PAVM PAVmed Inc

Item 1. Business

Background and Overview

PAVmed is a highly-differentiated multi-product technology medical device company organized to advance a broad pipeline of innovative medical technologies from concept to commercialization, employing a business model focused on capital efficiency and speed to market. Since inception on June 26, 2014, the Company’s activities have focused on advancing its lead products towards regulatory approval and commercialization, protecting its intellectual property, and building its corporate infrastructure and management team. The Company operates in one segment as a medical device company with four operating divisions which include GI Health, Minimally Invasive Interventions, Infusion Therapy, and Emerging Innovations. As resources permit, we will continue to explore internal and external innovations that fulfill our project selection criteria without limiting ourselves to any target specialty or condition. The Company has ongoing operations conducted in two active majority owned subsidiaries: Lucid Diagnostics, Inc. (“Lucid Diagnostics” or “Lucid”) incorporated in May 2018 and Solys Diagnostics, Inc. (“Solys Diagnostics” or “Solys”) incorporated in October 2019.

PAVmed and its subsidiaries have proprietary rights to the trademarks used herein, including, among others, PAVmed™, Lucid Diagnostics™, Caldus™, CarpX™, DisappEAR™, EsoCheck™, EsoGuard™, EsoCheck Cell Collection Device™ EsoCure Esophageal Ablation Device™ , NextCath™, NextFlo™, PortIO™, and “Innovating at the Speed of Life” ™. Solely as a matter of convenience, trademarks and trade names referred to herein may or may not be accompanied with the requisite marks of “™” or “®”, however, the absence of such marks is not intended to indicate, in any way, PAVmed or its subsidiaries will not assert, to the fullest extent possible under applicable law, their respective rights to such trademarks and trade names.

Our multiple products are in various phases of development and regulatory clearances or approvals. EsoCheck has received 510(k) marketing clearance from the U.S. Food and Drug Administration (“FDA”) as a generic esophageal cell collection device. EsoGuard has been established as a Laboratory Developed Test (“LDT”) and was launched commercially in December 2019 after Clinical Laboratory Improvement Amendment (“CLIA”) and College of American Pathologists (“CAP”) accreditation of the test at Lucid’s commercial diagnostic laboratory partner ResearchDx Inc. (“ResearchDx”), headquartered in Irvine, CA. Our other products in development have not yet received clearance or approval to be marketed or sold in the U.S. or elsewhere. We have been granted patents by the U.S. Patent and Trademark Office (“USPTO”) for CarpX, PortIO, and Caldus and have acquired licenses to certain patents and intellectual property for DisappEAR from Tufts University and a group of academic centers, for EsoGuard and EsoCheck from Case Western Reserve University (“CWRU”) and more recently for patents covering infrared technology to non-invasively detect glucose in tissue within the in-patient field of use from Liquid Sensing, Inc.

Our four operating divisions include:

A brief description of our key divisions and products is as follows:

GI Health

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Minimally Invasive Interventions

Infusion Therapy

Emerging Innovations

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GI Health (Gastroenterology – EsoGuard, EsoCheck, and EsoCure)

In May 2018, Lucid Diagnostics, a majority-owned subsidiary of PAVmed, entered into a patent license agreement with CWRU (the “CWRU License Agreement”), for the exclusive worldwide license of the intellectual property rights for two distinct proprietary technologies focused on the early detection and prevention of EAC, a highly lethal form of esophageal cancer.

The two patent-protected technologies licensed from CWRU are EsoGuard and EsoCheck:

Additionally, PAVmed has recently added the EsoCure Esophageal Ablation Device with Caldus Technology to its commercial product development pipeline. EsoCure is a disposable single-use thermal balloon ablation catheter designed to advance through the working channel of a standard endoscope and allow the clinician to treat dysplastic BE before it can progress to highly lethal EAC and to do so without the need for complex and expensive capital equipment. It complements Lucid Diagnostics’ portfolio of EsoGuard and EsoCheck products, which are designed to detect nondysplastic and dysplastic BE, as well as EAC itself. EsoCure incorporates PAVmed’s patented Caldus Technology (“Caldus”) which allows direct thermal tissue ablation using disposable single-use ablation devices. Once PAVmed completes its product development process including obtaining market clearance from the FDA, we intend to add EsoCure to our product offering being presented to the GI physician community by Lucid’s contract sales force.

Hence, our first commercial products consist of the EsoCheck device for collecting esophageal cells and the EsoGuard DNA assay for testing cells for the presence of BE and EAC, with both products now commercially available to be prescribed by physicians for U.S. patients. Currently, each product is permitted to be distributed as a separate and distinct product offering. However, we are planning a human clinical trial, expected to be approximately 31 months in duration, in support of an FDA premarket approval (“PMA”) application for the marketing of EsoCheck and EsoGuard in combination as a screening tool for the detection of BE. We also plan to develop and commercialize other products that use or enhance the same underlying technology or address the same disease states of the esophagus. We are also currently exploring commercial partnerships for the launch of EsoGuard outside the United States.

We believe the development and commercial availability of our EsoGuard diagnostic test is revolutionary, particularly when performed on samples collected by EsoCheck. Our molecular DNA assay has the potential to save many lives through early BE detection. We were affirmed in this belief in February 2020 when we received Breakthrough Device designation from the FDA for our EsoGuard Esophageal DNA Test on esophageal samples collected using its EsoCheck Cell Collection Device in a prevalent well-defined group of patients at elevated risk for esophageal dysplasia due to chronic GERD. The FDA Breakthrough Device Program was created to offer patients more timely access to breakthrough technologies which provide for more effective treatment or diagnosis of life-threatening or irreversibly debilitating human disease or conditions by expediting their development, assessment and review through enhanced communications and more efficient and flexible clinical study design, including more favorable pre/post market data collection balance. Breakthrough Devices receive priority FDA review, and a bipartisan bill before Congress (H.R. 5333) seeks to require Medicare to temporarily cover all Breakthrough Devices for three years while determining permanent coverage. Additionally, the National Cancer Institute (“NCI”) highlighted EsoGuard and EsoCheck as one of a handful of the year’s significant advances in cancer prevention in the NCI’s 2020 Annual Plan and Budget Proposal submitted to Congress.

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GI Health - Gastroenterology – EsoGuard, EsoCheck, and EsoCure

Furthermore, we believe EsoGuard and EsoCheck (and later EsoCure, if and when it receives FDA 510(k) clearance) will revolutionize the frequency and manner that GI physicians interact with patients suffering from chronic acid reflux and other diseases of the esophagus for the following reasons:

Our EsoGuard Opportunity

The incidence of EAC, the most common cancer of the esophagus, has quadrupled over the past 30 years. Its prognosis remains dismal, with fewer than 20% of patients surviving at five years. We are pursuing the development of the EsoGuard technology to provide the more than 30 million diagnosed GERD patients a non-invasive, less costly test by which to detect BE so that patients identified with the condition may receive surveillance and medical therapies well known to be highly effective at preventing progression to esophageal cancer.

The primary risk factor for, and a presumed cause of BE is GERD, commonly known as chronic heartburn or acid reflux, wherein stomach acid refluxes into the esophagus. GERD affects 20-40% of Western adult populations, according to published epidemiological data. The repeated exposure to stomach acid can lead to specific metaplastic and dysplastic, i.e. pre-cancerous changes in the esophageal lining, a condition known as Barrett’s Esophagus (which we refer to as BE).

BE is most diagnosed in the U.S. by the presence of so-called “salmon colored” mucosa visualized during upper endoscopy together with columnar epithelium (so-called intestinal metaplasia) seen on in biopsies taken from such an affected area. In BE, columnar epithelium replaces the stratified squamous epithelium which normally lines the distal esophagus (at the nexus of the stomach). This metaplastic epithelium is the initial manifestation of a progressive disease process, which, if unabated, continues through a dysplastic phase and ultimately into EAC. Due to the known risk for progression of BE toward EAC, current guidelines advise patients with nondysplastic BE to be enrolled in endoscopic surveillance programs in order to detect progression. Endoscopic surveillance includes extensive biopsy sampling, taken per the Seattle biopsy protocol. For nondysplastic BE, the American College of Gastroenterology recommends surveillance endoscopy at 3-5 year intervals. For patients with confirmed low grade dysplasia (“LGD”) and without life-limiting comorbidity, endoscopic therapy is considered as the preferred treatment modality, although endoscopic surveillance every 12 months is an acceptable alternative. Patients with high grade dysplasia (“HGD”) are to be managed with endoscopic therapy.

The only currently-validated approach to assess a patient for BE and EAC, and the current “gold standard”, is white light esophagogastroduodenoscopy (“EGD,” also commonly known as “upper endoscopy”), together with collection of multiple biopsy specimens from the potentially affected area in the distal esophagus. The procedure is invasive and expensive. In the U.S., EGD is almost always done under intravenous sedation in a specialized facility. It requires a patient to be fasting for several hours beforehand, to take a day off from work, and to be accompanied by a caregiver who also must miss work as a result. Multiple biopsies must be taken, and each must be read by a highly trained and specialized medical pathologist. Interpretation of these biopsies is highly subjective; for BE with LGD, pathological interpretation comes with an unacceptably low concordance rate between pathologists. The EGD procedure itself, the administration of anesthesia, and the procurement of biopsies, all carry medical risk. No screening alternative exists currently, and no device currently carries an FDA label indication to screen for any of these conditions. It is our belief that EsoGuard may become the widespread screening test to fulfill this unmet patient need similar to how pap smears and HPV testing have now become the widespread screening test to help eradicate cervical cancer.

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However, despite the well-accepted understanding that BE may progress to dysplasia and EAC, the clear guidance on the importance of BE surveillance and treatment, and the broad availability of EGD throughout the U.S., most cases of BE remain undiagnosed. Multiple studies demonstrate that more than 90% of patients who develop EAC never knew they had BE prior to their EAC diagnosis. A major opportunity for prevention of this cancer is being missed due to inadequate screening of at-risk populations. The major GI societies clearly define populations at high risk and advocate screening of such individuals, yet the vast majority go unscreened. It is estimated that more than 90% of high risk individuals for whom screening is currently indicated do not have it done. Put simply, nearly all EAC patients have evidence of BE but fewer than one in ten will have had the condition detected prior to their cancer diagnosis.

Dysplasia can be treated with ablation, but most patients are diagnosed with EAC at an advanced stage. EsoCheck and EsoGuard are designed to enhance screening and help clinicians catch BE and dysplasia while it’s still early enough to be treated and eliminated. Enhancing screening, in this case, means providing better sampling of the esophagus as well as a highly accurate test to determine whether precursor conditions have occurred.

Nearly all patients diagnosed with EAC have evidence of BE, and it is accepted that BE is a precursor condition on a spectrum of progression that in certain individuals will culminate in EAC, but in the vast majority of those with EAC, no prior diagnosis of BE will have been made. If detected before the EAC esophagus cancer develops, Barrett’s Esophagus can be successfully treated, usually with non-surgical approaches. Heartburn symptoms, commonly seen in patients with acid reflux with or without BE, can easily be treated with over-the counter medications, while a diagnosis of BE with LGD or HGD offers options for endoscopic management including radiofrequency ablation and local resection; these technologies have made LGD and HGD highly treatable with success rates of such therapies at greater than 90%.

Our EsoGuard and EsoCheck Solution

EsoCheck collects cells from the esophagus without the need for endoscopy in a non-invasive five-minute office-based procedure. Its proprietary and patent-protected Collect+Protect Technology protects collected samples from being diluted or contaminated during retrieval within an easy to swallow capsule the size of a gelcap. The capsule contains a proprietary textured balloon that when inflated inside the esophagus exposes ridges that have been shown to collect a greater amount of cellular material than predicate devices.

We have completed a survival porcine study that included side-by-side comparison testing between the EsoCheck Cell Collection Device and the Hobbs Medical Cytology Brush, a reference device included in our 510(k) submission to the FDA. The study was conducted under Good Laboratory Practices (“GLP”) per the FDA’s regulation 21 CFR Part 58.5 and the results submitted to the FDA as part of the EsoCheck 510(k) marketing application. One of the objectives of the study was to evaluate the performance of the EsoCheck Device and the Hobbs Medical Cytology Brush when used as indicated for cell collection in the esophagus in a clinically representative model. Specific evaluation included assessment of the adequacy of the sample of collected cells.

The study was performed utilizing four animals with two separate anatomic areas in each animal’s esophagus sampled with the EsoCheck device, and two separate anatomic areas in each animal’s esophagus sampled with the Hobbs Medical cytology brush to ensure that each cell sample was taken from a previously undisturbed area of the esophagus.

After collection of the esophageal cell samples, each cell collection device was placed in vials containing standard preservative solution. The vials were then delivered to a Clinical Laboratory Improvement Amendments (“CLIA”) and College of American Pathologists (“CAP”) certified laboratory for assessment of the cellular material. A pathologist with subspecialty board certification in gastrointestinal cytopathology reviewed the slides and cell counts were determined using standard methodology. Each slide was viewed under high-power and standard visual estimation techniques were used to determine the total number of cells sampled. The results showed an average number of cells greater than 25,000 for the EsoCheck device compared to an average number of cells greater than 11,000 for the Hobbs Medical Cytology Brush.

Once the targeted region of the esophagus is swabbed collecting cells on the balloon’s surface, the Collect+Protect Technology pulls the collected cells into the capsule where they are then protected during the retrieval process. Avoiding sample dilution is a key feature of the device since capturing unnecessary cells decreases the ability to detect the needed signal. The sampled cells can then be sent onto a molecular laboratory to perform any commercially available diagnostic test.

The use of EsoGuard, on samples collected using EsoCheck, may offer an accurate, lower cost, non-invasive approach, that does not require endoscopy, to screen for BE and EAC. The use of EsoGuard, on samples collected using EsoCheck, is not intended as a replacement for EGD. Instead of replacing EGD, it is our vision that the use of EsoGuard, on samples collected using EsoCheck, may “enlarge the top of the funnel” of high risk individuals who get screened in the first place; those who test positive by EsoGuard will proceed to an EGD, whether as a confirmatory diagnostic procedure, a therapeutic ablation procedure, or both.

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By focusing the use of these follow-up EGDs on patients with the highest pre-EGD likelihood of a positive finding, and by doing so more effectively and less expensively than the current risk stratification criteria allow, the use of EsoGuard, on samples collected using EsoCheck, may enable health care systems to allocate more effectively the resources they currently spend on performing EGDs.

EsoGuard and EsoCheck Development and Commercial Status

EsoCheck is commercially available under a substantial equivalence determination made by the FDA pursuant to a 510(k). On June 21, 2019, Lucid was notified by FDA that it may market EsoCheck, subject to the general controls provisions of the Food, Drug, and Cosmetic Act (the “FDCA”), as a cell collection device indicated for use in the collection and retrieval of surface cells of the esophagus in the general population of adults, 22 years of age and older.

EsoGuard is commercially available to be prescribed by physicians for patients in the United States as an LDT and has been reported in an article in Science Translational Medicine to have a high sensitivity and specificity for the detection of Barrett’s Esophagus with and without dysplasia, as well as for EAC. LDT refers to a laboratory developed test and is a type of molecular diagnostic test that is designed, manufactured and used within a single laboratory which is also certified pursuant to the CLIA to support the marketing of the test.

EsoCheck (i.e., by itself) may be used routinely by physicians to collect esophageal cells for various medical diagnostic purposes, including to diagnose or manage conditions such as Esophageal Candidiasis (a yeast infection of the esophagus which occurs in patients with compromised immune systems) and Eosinophilic Esophagitis (a common inflammatory condition of the esophagus) (“EoE”). EsoGuard (i.e., also by itself) may be performed on cytology samples collected by a means other than EsoCheck, e.g., via EGD. However, our present clinical development focus, and the subject of a recent IVD pre-submission meeting with the FDA, is on assessing the performance of the combined system (i.e., the use of the EsoGuard assay on cells collected using EsoCheck) as a screening tool to detect BE, with and without dysplasia, and/or EAC, in individuals deemed to be at high risk for these conditions.

Eosinophilic Esophagitis

In March 2020, we entered into a clinical trial research agreement with the University of Pennsylvania (“Penn”) for a clinical trial designed to evaluate whether Lucid’s EsoCheck Esophageal Cell Collection Device with Collect+Protect™ Technology provides a less invasive, more efficient, and cost-effective alternative to endoscopic biopsies in the management of patients with EoE.

EoE is a rapidly emerging allergy-mediated inflammatory condition of the esophagus similar to and often associated with inflammatory bowel disease (“IBD”). Although underappreciated by the medical community and frequently confused with GERD, EoE has a prevalence comparable to IBD and exacts a significant burden on patients. It can lead to swallowing difficulties, esophageal scarring, food impaction and pain. Current treatment includes oral steroids and an elimination diet. Since inflammation can persist despite resolution of symptoms, treatment courses can be very difficult and costly for patients, requiring multiple and frequent invasive endoscopies with biopsies. To date efforts to replace endoscopy with a non-invasive diagnostic device have proven unsuccessful.

The Lucid-Penn agreement covers a research program entitled “Pilot Study of EsoCheck Compared to Biopsies and Brush Cytology During Endoscopy for Evaluation of Eosinophilic Esophagitis” (the “Study”) led by principal investigator Gary W. Falk, M.D., M.S., AGAF. Dr. Falk is a professor of Gastroenterology, the clinical co-director of the Joint Center for Digestive, Liver and Pancreatic Medicine at the Perelman School of Medicine at the University of Pennsylvania, and the co-director of the Penn Medicine Esophageal and Swallowing Center at the Hospital of the University of Pennsylvania. He is also a Director of the International Society for Diseases of the Esophagus and Past President of the American Society of Gastrointestinal Endoscopy (ASGE).

The trial is a prospective cross-sectional pilot feasibility study of ten patients with suspected or established EoE scheduled for a clinically indicated upper endoscopy. The patients will undergo esophageal sampling using EsoCheck followed by endoscopy, including brushings and biopsies. The primary endpoint of the trial is the sensitivity and specificity of EsoCheck versus endoscopic biopsy in the assessment of EoE.

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Barrett’s Esophagus Screening Tool

We intend to seek FDA approval for the use of EsoGuard, on samples collected using EsoCheck, as an IVD device through a PMA submission. The combined system may offer an accurate, lower cost, non-invasive, approach to screen for BE with and without dysplasia, and for EAC, as compared with the current gold standard, namely diagnostic EGD plus biopsy. EsoCheck used for this purpose is performed as a five-minute office-based procedure without sedation. Samples collected are sent for laboratory analysis by EsoGuard and typically result in the issuance of a report of findings to the ordering physician, in under three weeks from the date of the test.

In October 2019, we had a pre-submission meeting with the FDA seeking FDA guidance on the clinical development plan we propose to conduct, consisting of a screening study and a case control study, in support of a future PMA submission to approve EsoCheck and EsoGuard as an IVD medical device. We expect to enroll our first patient in the early part of 2020.

In February 2020, we received Breakthrough Device designation from the FDA for its EsoGuard™ Esophageal DNA Test on esophageal samples collected using its EsoCheck Cell Collection Device in a prevalent well-defined group of patients at elevated risk for esophageal dysplasia due to chronic GERD. The FDA Breakthrough Device Program was created to offer patients more timely access to breakthrough technologies which “provide for more effective treatment or diagnosis of life-threatening or irreversibly debilitating human disease or conditions” by expediting their development, assessment and review through enhanced communications and more efficient and flexible clinical study design, including more favorable pre/post market data collection balance. Breakthrough Devices receive priority FDA review, and a bipartisan bill before Congress (H.R. 5333) seeks to require Medicare to temporarily cover all Breakthrough Devices for three years while determining permanent coverage.

EsoGuard Business Strategy

The EsoGuard technology is progressing through a two-phase regulatory and commercialization strategy which seeks to maximize the long-term commercial opportunity while providing near-term commercial milestones.

Near-Term Strategy

In June 2019, we received 510(k) marketing clearance for the EsoCheck cell collection device from the FDA, which determined that EsoCheck is substantially equivalent to legally marketed predicate devices for its indication for use, namely “the collection and retrieval of surface cells of the esophagus in the general population of adults, 22 years of age or older.” We are also pursuing other indications for EsoCheck beyond its use to collect cells for the EsoGuard DNA test. We have engaged key advisors to begin utilizing EsoCheck in other common esophageal conditions such as Esophageal Candidiasis and EoE.

EsoGuard has been established as an LDT and was launched commercially in December 2019 after completing CLIA/CAP certification of the test at Lucid’s commercial diagnostic laboratory partner ResearchDx, headquartered in Irvine, CA.

Laboratory Developed Tests

LDTs are clinical laboratory tests that are designed, manufactured and used within a single laboratory. The laboratories that furnish LDTs are subject to regulation under CLIA and state clinical laboratory licensure laws (where applicable). The FDA takes the position that LDTs meet the definition of a medical device under the FDCA. Historically, however, the FDA has exercised enforcement discretion with respect to most LDTs, and not actively enforced the regulatory requirements that otherwise apply to medical device manufacturers (e.g., premarket review, Quality Systems Regulation, adverse event reporting, establishment registration, device listing). The FDA has traditionally chosen to exercise enforcement discretion because LDTs were limited in number, were relatively simple tests, and were typically used to diagnose rare disease and uncommon conditions.

In October 2014, the FDA published two draft guidance documents describing a proposed risk-based framework under which the FDA proposed to end enforcement discretion and begin regulating LDTs as medical devices. The FDA’s draft framework proposed, among other things, premarket review for higher-risk LDTs, such as those that have the same intended use as FDA-approved companion diagnostic currently on the market. In November 2015, the FDA issued a report citing evidence for the need for additional regulation of LDTs and stated the FDA is continuing to work to finalize the 2014 draft guidance. However, in November 2016, the FDA announced that it did not intend to finalize the draft guidance at that time. In January 2017, the FDA issued a Discussion Paper on LDTs, which confirmed it did not intend to finalize the draft guidance at that time to allow more time for public discussion and time for the congressional authorizing committees to develop a legislative solution. Various legislative proposals that would give FDA express authority to regulate LDTs have been proposed since that time, but the chances of any specific proposal being enacted remain unclear at this time. It is also unclear at this time if or when the FDA may end enforcement discretion for LDTs, and the FDA may decide to regulate certain LDTs on a case-by-case basis at any time. Action by the FDA to actively regulate our LDT may materially impact our ability to develop and commercialize EsoGuard as planned.

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Reimbursement Strategy

Successful commercialization of our EsoGuard test depends, in large part, on our receipt of adequate reimbursement from government insurance plans, including Medicare and Medicaid, managed care organizations and private insurance plans. We are in the process of seeking a Local Coverage Determination (“LCD”) from Palmetto GBA (“Palmetto”), the Medicare Administrative Contractor (“MAC”) that coordinates coverage for molecular diagnostic tests and will subsequently seek private payer health insurance coverage for patients. As of yet, no payer has adopted a positive coverage policy for EsoGuard. Until such time, we will need to obtain reimbursement from payers on a case-by-case basis.

At the end of March 2019, we submitted an application for a Proprietary Laboratory Analysis (“PLA”) code for EsoGuard to the American Medical Association (the “AMA).” The AMA assigned EsoGuard PLA code 0114U “Gastroenterology (Barrett’s esophagus), VIM and CCNA1 methylation analysis, esophageal cells, algorithm reported as likelihood for Barrett’s esophagus” effective October 1, 2019.

The Clinical Laboratory Fee Schedule (“CLFS”) has not yet set the Center for Medicare and Medicaid Services (“CMS”) reimbursement rate for EsoGuard or EsoCheck, and neither have any other third-party payers approved reimbursement or set a reimbursement rate for our products. In December 2019, CMS posted the Final Determinations for new and revised billing codes for laboratory services under the Medicare CLFS. Under the Final Determinations, Medicare payment for the EsoGuard test will be set by the regional MACs under the “gapfill” process. Under this process, the MACs will consider test charges, resources, rates paid by other payers, rates paid for similar tests, and other factors. CMS will take the regional rates set by MACs in early 2020 and determine a preliminary CLFS rate for 2021 at the median of the MAC rates. This preliminary rate will be subject to comments before being finalized later in 2020. The final gapfill amount will apply for the period January 1, 2021 through December 31, 2023.

Commercial third-party payors often rely upon Medicare coverage policy and payment limitations in setting their own reimbursement policies. Third-party payers are increasingly attempting to contain healthcare costs by limiting both coverage and the level of reimbursement for new healthcare products. As a result, there is uncertainty surrounding whether EsoGuard or EsoCheck, or any other product or service we develop, will be eligible for coverage by third-party payers or, if eligible for coverage, what the reimbursement rates will be. Reimbursement of esophageal cancer screening by a third-party payer may depend on a number of factors, including a payer’s determination that tests using our technologies are: sensitive and specific for esophageal cancer and pre-cancer; not experimental or investigational; approved or recommended by the major guidelines organizations; reliable, safe and effective; medically necessary; appropriate for the specific patient; and cost-effective.

Medicare

For EsoGuard, Medicare reimbursement is critical. CMS relies on a network of MACs to process provider claims for reimbursement, including claims for diagnostic tests. Where appropriate, MACs draft and finalize LCDs that describe the circumstances under which an item or service that is not included in the CLFS will (or will not) be covered. Almost all EsoGuard claims will be processed by the MAC for California, Noridian Healthcare Solutions (“Noridian”). Noridian participates in the Molecular Diagnostic Services (“MolDX”) Program coordinated by Palmetto. Under the MolDX Program, Palmetto reviews a detailed dossier of information describing the performance characteristics of molecular diagnostic tests (i.e., data describing the test’s analytical validity, clinical validity, and clinical utility) and, working collaboratively with other MAC medical directors, decides whether to cover a test. We will need to work with the MolDX Program to obtain a favorable final LCD before Noridian will pay claims for EsoGuard.

LDTs that are covered by Medicare are generally reimbursed under the Medicare CLFS. From time to time, Congress has revised the Medicare statute, including how CMS establishes CLFS payment rates. The payment amounts established under the Medicare fee schedules (such as the CLFS) are important because they will determine the amount of reimbursement for a diagnostic under Medicare, and those payment amounts are also often used as a basis for payment amounts set by other governmental and private third-party payers. For example, state Medicaid programs are prohibited from paying more than the CLFS rate for clinical laboratory services furnished to Medicaid recipients.

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Private Third-Party Payers

In addition to seeking Medicare coverage and reimbursement, we will seek coverage and reimbursement from private payers such as health insurance companies and HMOs. Private payers generally will determine whether to approve an LDT for reimbursement based on the published results demonstrating the analytical validity, clinical validity, and clinical utility of the test.

Reimbursement rates paid by private third-party payers can vary based on whether the provider is considered to be an “in-network” provider, a participating provider, a covered provider, an “out-of-network” provider or a non-participating provider. These definitions can vary among payers. An in-network provider usually has a contract with the payer or benefits provider. This contract governs, among other things, service-level agreements and reimbursement rates. In certain instances, an insurance company may negotiate an in-network rate for our testing. An in-network provider may have rates that are lower per test than those that are out-of-network, and that rate can vary widely. Rates vary based on the payer, the testing type and often the specifics of the patient’s insurance plan. If a laboratory agrees to contract as an in-network provider, it generally expects to receive quicker payment and access to additional covered patients. However, it is likely that we will initially be considered an “out-of-network” or non-participating provider by payers who cover the vast majority of patients until we can negotiate contracts with the payers. Our out-of-network claims may be subject to certain “surprise billing” restrictions enacted by state legislatures and/or currently under consideration in the U.S. Congress.

We cannot predict whether, or under what circumstances, payers will cover and pay for our tests. Full or partial denial of coverage by payers, or reimbursement at inadequate levels, would have a material adverse impact on our business and on market acceptance of our tests.

We are pursuing a variety of strategies to maximize commercial payer coverage for EsoGuard, including developing cost effectiveness data to provide to payers to make the case for EsoGuard reimbursement. We will focus our efforts on large national and regional insurers and health plans that have affiliated health systems.

When there is a private or governmental third-party payer coverage policy in place, we will bill the payer through our contract laboratory service provider (and the patient for cost-sharing, where applicable). Our efforts in obtaining reimbursement based on individual claims, including pursuing appeals or reconsiderations of claims denials, could take a substantial amount of time, and bills may not be paid for many months, if at all. Furthermore, if a third-party payer denies coverage after final appeal, payment may not be received at all. Where there is no coverage policy in place, we will pursue reimbursement on a case-by-case basis.

Longer-Term Strategy

Our longer-term strategy is to secure a specific indication, based on published guidelines, for BE screening in certain at-risk populations using EsoGuard on samples collected with EsoCheck. This requires having the EsoGuard screening system cleared or approved by the FDA as an IVD device, a process which is progressing in close collaboration with our medical and regulatory advisors, including the former Director, Office of In Vitro Diagnostics and Radiological Health, FDA Center for Devices and Radiological Health. An FDA pre-submission package outlining Lucid-sponsored clinical studies to be performed in support of this indication has been submitted and a pre-submission meeting held with the FDA on October 9, 2019 to discuss its clinical data requirements for a premarket submission to approve EsoGuard as an IVD medical device. As part of advancing this longer-term strategy, PAVmed hired David F. Wurtman, M.D., in February 2019 to act as, and spend substantially all of his time as, Lucid’s Chief Medical Officer. In June 2019, PAVmed hired Randy Brown, to act as and spend substantially all of his time as Lucid’s Chief Operating Officer. Mr. Brown, who recently served as the director of clinical operations of a large multinational medical device company, is overseeing clinical planning of these upcoming clinical trials sponsored by Lucid, as well as operations of the EsoGuard LDT. In September 2019, we entered into an agreement with a clinical research organization (“CRO”) in connection with EsoGuard clinical trials. The CRO will assist us with conducting two concurrent clinical trials, an EsoGuard screening study and an EsoGuard case control study. The term of the agreement with the CRO runs from the September 2019 to the conclusion of the respective clinical trials, which is expected not to exceed 31 months. The agreement may be cancelled with sixty days written notice, without an early termination fee. We enrolled our first patient in the clinical trials in February 2020.

The screening study will enroll GERD patients without a prior diagnosis of BE or EAC who satisfy ACG BE screening guidelines. The case control study will enroll patients with a previous diagnosis of non-dysplastic BE, dysplastic BE (both low and high-grade) or EAC. In both studies, EsoGuard will be compared to the gold standard of endoscopy with biopsies. In February 2020, EsoGuard has received Breakthrough Device designation from the FDA for its EsoGuard Esophageal DNA Test on esophageal samples collected using its EsoCheck Cell Collection Device in a prevalent well-defined group of patients at elevated risk for esophageal dysplasia due to chronic GERD.

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FDA Breakthrough Device

The U.S. Food and Drug Administration “Breakthrough Device” designation relates to the FDA’s Breakthrough Device Program that was created to offer patients more timely access to breakthrough technologies which provide for more effective treatment or diagnosis of life-threatening or irreversibly debilitating human disease or conditions by expediting their development, assessment and review through enhanced communications and more efficient and flexible clinical study design, including more favorable pre- and post-market data collection. Breakthrough Devices receive priority FDA review, and a bipartisan bill before Congress (H.R. 5333) seeks to require Medicare to temporarily cover all Breakthrough Devices for three years while determining permanent coverage.

In-Vitro Diagnostics

IVDs are regulated by the FDA as medical devices. Medical devices marketed in the United States are subject to the regulatory controls under the FDCA and regulations adopted by the FDA. Some requirements, known as premarket requirements, apply to medical devices before they are marketed, and other requirements, known as post-market requirements, apply to medical devices after they are marketed.

The particular premarket requirements that must be met to market a medical device in the United States will depend on the classification of the device under FDA regulations. Medical devices are categorized into one of three classes, based on the degree of risk they present. Devices that pose the lowest risk are designated as Class I devices; devices that pose moderate risk are designated as Class II devices and are subject to general controls and special controls; and the devices that pose the highest risk are designated as Class III devices and are subject to general controls and premarket approval.

A premarket submission to the FDA will be required for some Class I devices, most Class II devices; and all Class III devices. Most Class I and some Class II devices are exempt from premarket submission requirements. Some Class I and most Class II devices may be marketed after a 510(k) clearance, while a more extensive PMA is required to market Class III devices.

Unless the FDA begins enforcing the medical device requirements with respect to LDTs (either generally or with respect to our specific test), or Congress enacts legislation that explicitly gives FDA the authority to regulate LDTs, EsoGuard (as a stand-alone product) will not be subject to FDA requirements, including (without limitation) the requirements for FDA premarket review and post-market controls. Since the EsoGuard test is being performed in a clinical laboratory, the laboratory will be subject to CLIA requirements, as well as the laboratory requirements in the state in which the laboratory is located (if applicable). Insofar as the laboratory accepts specimens from patients nationwide, the laboratory will be required to obtain an out-of-state laboratory license from regulators in New York, California, Pennsylvania, Maryland, and Rhode Island. Moreover, before we can begin offering our LDT to patients in New York, we must obtain test-specific approval from the state.

Complying with the FDA’s requirements for medical devices can be expensive, time consuming, and may subject us to significant or unanticipated delays. If we are required to obtain premarket clearance or approval to perform or continue performing EsoGuard tests, or otherwise become subject to FDA regulation (e.g., via an act of Congress), we cannot assure you that we will be able to obtain such clearance or approval or comply with such regulations. Even if we obtain regulatory clearance or approval where required, such authorization may not be for an intended use that we believe to be commercially attractive or critical to the commercial success of our tests. As a result, the application of FDA oversight to our tests could materially and adversely affect our business, financial condition, and results of operations.

However, in parallel to our efforts to commercialize EsoGuard as an LDT, we are engaging with the FDA to explore the possibility of performing EsoGuard on cell samples collected using EsoCheck as an IVD. The IVD path seeks to secure a specific Barrett’s Esophagus screening indication for EsoGuard and EsoCheck as an FDA-cleared device in high-risk GERD patients as defined by published society guidelines. This will allow EsoGuard and EsoCheck to be broadly marketed together as a single diagnostic tool to screen patients for BE. It requires a premarket submission to the FDA supported by strong clinical data demonstrating that EsoGuard performed on samples collected with EsoCheck is sufficiently sensitive and specific to serve as a widespread screening tool in high-risk GERD patients recommended for screening. We have provided a pre-submission document to the FDA outlining our clinical plan and have held a pre-submission meeting with the FDA on October 9, 2019 to review the proposed clinical plan to meet the above endpoints in an effort to secure EsoGuard IVD FDA clearance as a medical device once the clinical study is completed. The EsoGuard screening tool also has received a “Breakthrough Device” designation, which will facilitate the process of seeking premarket approval.

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CWRU License Agreement

In May 2018, PAVmed incorporated Lucid Diagnostics and caused Lucid to issue a total of 10.0 million founders shares of its common stock for a purchase price of $0.001 per share, including: the issue of 8,187,499 founders shares to PAVmed; 943,464 founders shares to CWRU; and 289,679 founders shares to each of the three individual physician inventors of the of the intellectual property and proprietary technologies underlying the CWRU License Agreement.

In May 2018, Lucid entered into the CWRU License Agreement. Under the terms of the CWRU License Agreement, we acquired an exclusive worldwide right to use the intellectual property rights to the EsoGuard and EsoCheck technology for the detection of changes in the esophagus. CWRU retains the right to grant licenses to the EsoCheck and EsoGuard technology for other non-overlapping uses.

The CWRU License Agreement required Lucid to pay an initial license fee to CWRU of approximately $273,000. The initial license fee consisted of an initial payment of $50,000, followed by quarterly payments of $50,000 until such fee is paid-in-full, provided, however, the commencement of the quarterly payments is subject to the Company consummation of a bona fide financing with an unrelated third-party in excess of $500,000. As of December 31, 2019 and 2018, respectively, the balance of the initial license fee of $273,000 remains unpaid.

The CWRU License Agreement also provides for potential payments upon the achievement of certain product development and regulatory clearance milestones. In this regard, upon FDA clearance on June 21, 2019 of the EsoCheck device, Lucid incurred a $75,000 milestone payment. The CWRU License Agreement also provides for two additional milestone obligations with a payment of $100,000 due within 30 days upon the first commercial sale of a licensed product and a payment of $200,000 due upon a PMA submission to the FDA related to a licensed product.

The Company will be required to pay CWRU a royalty of 5% on net sales of less than $100,000,000 per contract year and 8% for net sales greater than $100,000,000 per contract year, with the following minimum annual royalty payments:

Under the CWRU License Agreement, Lucid is responsible for the costs of CWRU in preparing, filing and prosecuting any patents related to the EsoGuard and EsoCheck technology (subject to a provision for cost sharing in the event CWRU grants other non-overlapping licenses to the technology). CWRU agreed to apply for patent coverage, at Lucid’s expense, in any country requested by Lucid, to the extent such protection is reasonably attainable. CWRU also may apply for patent, copyright or trademark rights to the EsoGuard and EsoCheck technology in other countries, at its option, and Lucid will have no rights under any the patents in such countries unless Lucid reimburses CWRU for its expenses. In the event of any actual or threatened infringement of any patent in the field of use covered by the License Agreement, Lucid will have the first right to commence an action against the infringer. Lucid also will have the right to defend against any claims that the EsoGuard and EsoCheck technology infringes on the intellectual property rights of a third party.

The CWRU License Agreement provides for Lucid to indemnify CWRU and certain related parties for any claims relating to product liability or similar claims involving acts or omissions by Lucid in connection with the EsoGuard technology and the development, use or sale of products based on such technology, or relating to Lucid’s gross negligence or willful misconduct, or relating to our breach of the CWRU License Agreement, unless, in any case, such claim results from the gross negligence or willful misconduct of CWRU.

The CWRU License Agreement terminates upon the expiration of certain related patents, or on May 12, 2038 in countries where no such patents exist, or upon expiration of any exclusive marketing rights that have been granted by the FDA or other U.S. government agency, whichever comes later. The key EsoGuard U.S. patents begin to expire in August 2024, however, Lucid is pursuing applications of the clinical utility to extend the patent protection with more recently filed families of cases that have a twenty year term and will be set to expire in the mid to late 2030’s once they are issued. It is noteworthy that the accuracy confidence of the EsoGuard assay has only been tested with cells collected using the EsoCheck Collect + Protect technology. The key EsoCheck device U.S. patents begin to expire in December 2034. In the event that Lucid defaults in the payment of any amount when due under the License Agreement, and such amount is not paid within 30 days of notice of nonpayment, CWRU may terminate the exclusivity of the license or terminate the CWRU License Agreement in full. In addition, either party may terminate the CWRU License Agreement upon the other party’s default in the performance of its obligations under the License Agreement, subject to certain grace periods. Upon expiration of the CWRU License Agreement in the ordinary course, we expect to continue selling products using the EsoGuard and EsoCheck technology, as CWRU’s proprietary intellectual property rights in the technology also will have expired.

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EsoGuard Sales and Marketing

We currently expect to commercialize the EsoCheck and EsoGuard products through a network of independent U.S. sales representative and/or inventory-stocking medical distributors. To do so, we rely on having a high gross margin on our products, although there can be no assurance that we will be able to achieve such margins. A high gross margin allows us to properly incentivize our independent sales reps and distributors, which in turn allows us to attract the top independent reps and distributors with the most robust networks in our targeted specialties. Independent distributors play an even larger role in many parts of Europe, most of Asia and emerging markets worldwide.

We eventually may, however, choose to build (or obtain through a strategic acquisition) our own sales and marketing team to commercialize some or all of the EsoCheck and EsoGuard products if it is in our long-term interests. We may also choose to enter into distribution agreements with one or more larger strategic partners whereby we retain full responsibility for the manufacturing of the EsoCheck and EsoGuard products but outsource a substantial portion or all of our distribution to a partner with its own robust distribution channels. Such agreements may include regional carve outs, minimum sales volumes, margin splitting and/or an option or right of first offer to purchase the technology at a future date.

EsoGuard Clinical Laboratory and EsoCheck Manufacturing

EsoGuard will be marketed as an LDT, which is a clinical laboratory test that is designed, manufactured and used within a single laboratory. The laboratories that furnish LDTs are subject to regulation under CLIA and state clinical laboratory licensure laws (where applicable). We will depend on third parties as the clinical laboratories for our LDTs. Although we relied on the central reference laboratory in Cleveland, Ohio, to complete our initial EsoGuard LDT validation process, as part of our longer term commercialization strategy, we have established an outsourced contract relationship with ResearchDx, a state-of-the-art, highly automated contract diagnostic organization in Irvine, California that is certified pursuant to federal CLIA requirements to perform key portions of the assay to support the marketing of the EsoGuard LDT. ResearchDx will have the capacity to process and report on the volume of expected patient samples using EsoGuard for the foreseeable future. We completed the EsoGuard LDT validation process at ResearchDx in December 2019, making the LDT test available for physicians to prescribe for patients.

We currently have no plans to use in-house facilities to manufacture the EsoCheck device, because the fixed overhead costs and limited flexibility involved in owning manufacturing facilities are not consistent with our business strategy. The diagnostic medical device industry, including many of its largest players, depends heavily on contract manufacturers operating in the United States and abroad. Diagnostic medical device manufacturers are subject to extensive regulation by the FDA and other authorities. Compliance with these regulations is costly and particularly onerous on small, development-phase companies. Contract manufacturers can also take advantage of significant economies of scale in terms of purchasing, machining, tooling, specialized personnel, sub-contracting or even off-shoring certain processes to lower-cost operators. These economies are simply not available to us.

We have relationships with many contract manufacturers and service providers, including those with specialized skills in several processes important to our devices. We expect them to have sufficient capacity to handle our manufacturing needs and anticipate that our growth will be better served by deploying our resources to expand our pipeline and commercialization efforts.

We intend to work closely with our contract manufacturing partners and service providers to establish and manage the EsoCheck and EsoGuard products’ supply chain, dual sourcing whenever possible. We expect to help them design and build the EsoCheck and EsoGuard products’ manufacturing lines including subassembly, assembly, sterilization and packaging and to work closely with them to manage our quality system, to assure compliance with all regulations and to handle inspections or other queries with regulatory bodies. Our contract manufacturers have the ability to add lines and shifts to increase the manufacturing capacity of the EsoCheck and EsoGuard products as our demand dictates. We may ship our products directly from our contract manufacturers, but we may also choose to utilize third-party regional warehousing and distribution services.

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EsoGuard and EsoCheck Intellectual Property

Our GI Health business will depend on proprietary medical device and diagnostic technologies, including the EsoCheck and EsoGuard technology licensed by us. We intend to vigorously protect our proprietary technologies’ intellectual property rights in patents, trademarks and copyrights, as available through registration in the United States and internationally. Patent protection and other proprietary rights are thus essential to our GI Health business. The EsoCheck and EsoGuard technology is protected by patents in the United States and internationally, and our policy is to continue to aggressively file patent applications, both independently and in collaboration with CWRU, as appropriate, to protect this technology and other proprietary technologies of ours relating to our GI Health business, including inventions and improvements to inventions. Under the CWRU License Agreement, CWRU has agreed to apply for patent coverage, at our expense, in any country requested by us, to the extent such protection is reasonably attainable. We seek patent protection, as appropriate, on:

In addition to filing and prosecuting patent applications in the United States, we intend to file counterpart patent applications in Canada, the European Union and other countries worldwide. Foreign filings can be cumbersome and expensive and we will pursue such filings when we believe they are warranted as we try to balance our international commercialization plans with our desire to protect the global value of the technology.

The term of individual patents depends upon the legal term of the patents in the countries in which they are obtained. In most countries in which we file, the patent term is 20 years from the earliest date of filing a non-provisional patent application. In the United States, a patent’s term may be shortened if a patent is terminally disclaimed over another patent or as a result of delays in patent prosecution by the patentee, and a patent’s term may be lengthened by patent term adjustment, which compensates a patentee for administrative delays by the USPTO in granting a patent.

We intend to continuously reassess and fine-tune our intellectual property strategy in order to fortify the position of our GI Health business in the United States and internationally. Prior to acquiring or licensing a technology from a third party, we will evaluate the existing proprietary rights, our ability to adequately obtain and protect these rights and the likelihood or possibility of infringement upon competing rights of others.

We will also rely upon trade secrets, know-how, continuing technological innovation, and may rely upon licensing opportunities in the future, to develop and maintain our competitive position in our GI Health business. We intend to protect our proprietary rights through a variety of methods, including confidentiality agreements and/or proprietary information agreements with suppliers, employees, consultants, independent contractors and other entities who may have access to proprietary information. We will generally require employees to assign patents and other intellectual property to us as a condition of employment with us. All of our consulting agreements will pre-emptively assign to us all new and improved intellectual property that arise during the term of the agreement.

The License Agreement with CWRU terminates upon the expiration of certain related patents, or on May 12, 2038 in countries where no such patents exist, or upon expiration of any exclusive marketing rights that have been granted by the FDA or other U.S. government agency, whichever comes later. The key EsoGuard U.S. patents begin to expire in August 2024, however, the company is pursuing applications of the clinical utility to extend the patent protection with more recently filed families of cases that have a twenty year term and will be set to expire in the mid to late 2030’s once they are issued. It is noteworthy that the accuracy confidence of the EsoGuard assay has only been tested with cells collected using the EsoCheck Collect + Protect technology. The key EsoCheck device U.S. patents begin to expire in December 2034. In the event that we default in the payment of any amount when due under the License Agreement, and such amount is not paid within 30 days of notice of nonpayment, CWRU may terminate the exclusivity of the license or terminate the License Agreement in full. In addition, either party may terminate the License Agreement upon the other party’s default in the performance of its obligations under the License Agreement, subject to certain grace periods. Upon expiration of the License Agreement in the ordinary course, we expect to continue selling products using the EsoGuard and EsoCheck technology, as CWRU’s proprietary intellectual property rights in the technology also will have expired.

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EsoGuard and EsoCheck Competition

The U.S. market for esophageal cancer (i.e., EAC) and pre-cancer (i.e., BE, with or without dysplasia) screening is large, consisting of more than 30 million at-risk individuals over the age of 50. Given the large market for pre-cancer screening, we likely will face numerous competitors, some of which possess significantly greater financial and other resources and development capabilities than us. Our EsoGuard test faces competition from procedure-based detection technologies such as upper endoscopy, and other screening technologies such as pill-based imaging solutions like PillCam Eso, cleared by the FDA in November 2004, and transnasal esophagoscopy, a flexible tube with a miniature camera that is inserted into the nose and advanced through the esophagus into the upper portion of the stomach. Our EsoCheck device faces competition from other manufactures with devices designed to collect cell samples from targeted regions of the esophagus. For example, Cytosponge is a small mesh sponge within a soluble gelatin capsule that dissolves in the stomach and then is pulled thru the targeted region brushing the lining of the esophagus and then later retrieved, although, unlike EsoCheck, it is unprotected from contamination. Interpace Diagnostics (Nasdaq: IDXG), NeoGenomics (Nasdaq: NEO) and Cernostics (private) are developing progression type test for known patients with BE aimed at assessing or predicting the likely development of EAC. Our competitors may also be developing additional methods of detecting esophageal cancer and pre-cancer that have not yet been announced.

Accordingly, the market for our GI Health products is highly competitive and is characterized by extensive research and clinical efforts and rapid technological change. In order to compete effectively, EsoGuard and EsoCheck will have to achieve market acceptance, receive adequate insurance coverage and reimbursement, be cost effective and be simultaneously safe and effective. We believe that the principal competitive factors in our markets are:

Most of our existing and potential competitors have substantially greater financial, marketing, sales, distribution, manufacturing and technological resources. We may be unable to compete effectively against our competitors either because their products and services are superior or more cost efficient, or because of they have access to greater resources than us. These competitors may have greater name recognition than we do. Many of these competitors have obtained all desirable FDA or other regulatory approvals, and superior patent protection, for their products. Certain of our competitors have already commercialized their products, and others may commercialize their products in advance of our products. In addition, our competitors may make technical advances that render our products obsolete. We may be unable to respond to such technical advances.

Notwithstanding that the market for BE and EAC screening is highly competitive, we believe that EsoCheck, currently cleared by the FDA pursuant to a 510(k), and EsoGuard, the first and only DNA-based non-invasive BE screening LDT test on the market today, compare favorably to other available products and services. When used in combination after achieving FDA approval as an IVD medical device through the PMA process, the use of EsoGuard, on samples collected using EsoCheck, may offer an accurate, lower cost, non-invasive approach, that does not require endoscopy, to screen for BE and EAC. The test may be performed in five minutes, without sedation, in an outpatient ambulatory setting such as a primary care or family practice physician’s office or a freestanding diagnostic facility.

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EsoGuard and EsoCheck Specific Government Regulation

HIPAA and Other Privacy Laws

The Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act (“HIPAA”) established comprehensive protection for the privacy and security of health information. The HIPAA standards apply to three types of organizations, or “Covered Entities”: health plans, healthcare clearinghouses, and healthcare providers that conduct certain healthcare transactions electronically. Covered Entities and their business associates must have in place administrative, physical, and technical standards to guard against the misuse of individually identifiable health information. We perform activities that may implicate HIPAA, such as providing clinical laboratory testing services and entering into specific kinds of relationships with Covered Entities and business associates of Covered Entities. Penalties for violations of HIPAA include civil money and criminal penalties.

Our activities must also comply with other applicable privacy laws, which impose restrictions on the access, use and disclosure of personal information. More state and international privacy laws are being adopted. Many state laws are not preempted by HIPAA because they are more stringent or are broader in scope than HIPAA. Beginning in 2020 we will also need to comply with the California Consumer Privacy Act of 2018, which protects personal information other than health information covered by HIPAA. In the E.U., the General Data Protection Regulation (“GDPR”) took effect in May 2018 and imposes increasingly stringent data protection and privacy rules. All of these laws may impact our business and may change periodically, which could have an effect on our business operations if compliance becomes substantially costlier than under current requirements. Our failure to comply with these privacy laws or significant changes in the laws restricting our ability to obtain patient samples and associated patient information could significantly impact our business and our future business plans.

Self-Referral Law

The federal “self-referral” law, commonly referred to as the “Stark” law, provides that physicians who, personally or through a family member, have ownership interests in or compensation arrangements with a laboratory are prohibited from making a referral to that laboratory for laboratory tests reimbursable by Medicare, and also prohibits laboratories from submitting a claim for Medicare payments for laboratory tests referred by physicians who, personally or through a family member, have ownership interests in or compensation arrangements with the testing laboratory. The Stark law contains a number of specific exceptions which, if met, permit physicians who have ownership or compensation arrangements with a testing laboratory to make referrals to that laboratory and permit the laboratory to submit claims for Medicare payments for laboratory tests performed pursuant to such referrals. We are subject to comparable state laws, some of which apply to all payers regardless of source of payment, and do not contain identical exceptions to the Stark law.

Specimen Transportation

Our commercialization activities for EsoGuard subject us to regulations of the Department of Transportation, the United States Postal Service, and the Centers for Disease Control and Prevention that apply to the surface and air transportation of clinical laboratory specimens.

Environmental

The cost of compliance with federal, state and local provisions related to the protection of the environment has had no material effect on our GI Health business. There were no material capital expenditures for environmental control facilities in the years ended December 31, 2018 and 2019, and there are no material expenditures planned for such purposes for the year ended December 31, 2020.

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Minimally Invasive Interventions

CarpX - Percutaneous Device to Treat Carpal Tunnel Syndrome

The Market

CTS is the most common cumulative trauma disorder and accounts for over half of all occupational injuries. The carpal tunnel is an anatomic compartment in the wrist through which tendons and the median nerve pass. Cumulative trauma leads to inflammation which manifests itself clinically through its compressive effect on the median nerve, resulting in motor and sensory dysfunction in the hand. A survey published in the Journal of the American Medical Association reported 2.5% of U.S. adults, or approximately five million individuals, have CTS and about 600,000 surgical procedures are performed annually for CTS. According to the Centers for Disease Control and Prevention, CTS accounts for two million office visits per year. Of the CTS patients that are candidates for surgery, an estimated 1.5 million CTS patients continue to suffer in silence rather than undergoing traditional invasive surgery due to concerns over the prolonged recovery time associated with an open incision. According to the Agency for Health Care Policy and Research, CTS costs the U.S. over $20.0 billion in annual workers’ compensation costs.

Current Devices and Their Limitations

Patients who have failed to improve with physical therapy or other non-invasive treatments are candidates for interventions which seek to relieve the compression of the median nerve by cutting the transverse carpal ligament, which forms the superficial wall of the carpal tunnel. Traditional surgical approaches are effective but are invasive and must be performed in a surgical operating room. Endoscopic approaches are less invasive, but are more technically challenging, more expensive and have been associated with higher complication rates. These approaches still require a surgical incision and some surgical dissection before the endoscope is passed into the carpal tunnel. Two less-invasive devices are currently on the market. One device attempts to use transillumination to guide blind passage of a protected knife and the other passes a saw-like device blindly or by ultrasound guidance. Technical limitations have hindered market acceptance of these devices.

Our Solution

We have developed CarpX as a patented, single-use disposable, minimally invasive medical device designed as a precision cutting tool to treat carpal tunnel syndrome while reducing recovery times. We believe our device will allow the physician to relieve the compression on the median nerve without an open incision or the need for endoscopic or other imaging equipment. To use our device, the operator first advances a guidewire through the carpal tunnel under the ligament. Our device is then advanced over the wire and positioned in the carpal tunnel under ultrasonic and/or fluoroscopic guidance. When the balloon is inflated it creates tension in the ligament positioning the cutting electrodes underneath it and creates space within the tunnel, providing anatomic separation between the target ligament and critical structures such as the median nerve. Radiofrequency energy is briefly delivered to the electrodes, rapidly cutting the ligament and relieving the pressure on the nerve. We believe our device will be significantly less invasive than existing treatments. We also believe it will allow for more extensive lateral dissection within the tunnel and more reliable division of the ligament, resulting in lower recurrence rates than some of the endoscopic approaches. The USPTO has issued U.S. Patent 10,335,189 which covers the technology underlying PAVmed’s CarpX minimally invasive device developed to treat carpal tunnel syndrome. The patent, assigned to PAVmed at its founding, lists Lishan Aklog, M.D., PAVmed’s Chairman and Chief Executive Officer, and Brian J. deGuzman, M.D., its Chief Medical Officer, as inventors. We have advanced, in partnership with our design and contract manufacturing partners, our CarpX product from concept to working prototypes, completed successful benchtop and cadaver testing confirming the device consistently cuts the transverse carpal ligament, as well as commercial design and development, and performed pre-submission verification and validation testing.

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Regulatory History

On November 2017, we filed with the FDA a premarket notification submission for CarpX under section 510(k) of the FDCA using a commercially available carpel tunnel release device as a predicate.

In July 2018, the FDA received our response to its requests-for-information regarding non-clinical support for our 510(k) premarket notification submission. Our response to the FDA included results from an animal study, which documented the device’s bipolar electrode design results in minimal spread of thermal energy – less than one-millimeter thermal injury by pathologic analysis – and no increase in tissue temperatures except directly over the cutting electrodes. Our response also included additional physician usability testing, wherein each of the hand surgeons successfully performed the CarpX procedure multiple times in cadavers.

In August 2018 we were notified by the lead FDA branch reviewing the 510(k) premarket notification submission it had not reached a consensus with the consulting branch within the review period allotted under the FDA’s rules and regulations. Accordingly, the lead branch recommended we take the appropriate steps to extend the review process through resubmission of the 510(k) premarket notification.

In January 2019, following an in-person pre-submission meeting, the FDA recommended clinical testing to definitively document CarpX procedural safety in humans and indicated data from a properly structured clinical study outside of the U.S. would be acceptable, precluding the need to engage in the time-consuming FDA Investigational Device Exemption (IDE) process required for U.S. studies. We offered to amend our previously planned first-in-human (“FIH”) clinical trial in New Zealand to meet this clinical testing recommendation and postponed the initiation of the amended study until study parameters were finalized with the FDA. We reached a consensus with the FDA on the parameters of the CarpX FIH safety study, including both pre-operative and post-operative electrodiagnostic testing to document device safety. The CarpX FIH safety study was designed as a single-arm, two-center, two-surgeon, 20-patient study of the CarpX procedure in carpal tunnel syndrome patients, with a device safety primary endpoint defined as the absence of certain serious device-related adverse events over a limited 90-day follow-up period.

By August 2019, all 20 patients of its FIH 510(k) clinical safety study underwent successful CarpX procedures.

In December 2019, PAVmed personnel and the local clinical investigators in New Zealand completed an on-site review of the study data concluding that the device appeared to meet the study’s primary effectiveness and safety endpoints. The remaining tasks required before a resubmission could occur included finalization of the clinical reports, including customary overreads of the diagnostic test results by a U.S. physician. Following the completion of the overreads, the 510(k) application was compiled with the requisite compendium of clinical data and submitted to the FDA.

In March 2020, we announced the FDA acknowledged receipt of a 510(k) premarket notification submission for our CarpX minimally invasive carpal tunnel device. This re-submission incorporates data from the FIH clinical safety study described above, in which all patients met the study’s pre-specified safety and effectiveness endpoints. The final report noted that twenty carpal tunnel syndrome patients in New Zealand underwent successful CarpX minimally invasive carpal tunnel release. All patients met the study’s pre-specified effectiveness endpoint – clinical device technical success defined as the ability of CarpX to perform complete division of the transverse carpal ligament as assessed by post-procedural endoscopic inspection of the transverse carpal ligament after treatment. Two-week and 90-day post-operative follow-up rates were 100% and 95%, respectively, exceeding the target 80% rate recommended by the FDA. The only loss to follow-up was a patient who was documented to be “back to normal” with resolution of symptoms at six weeks but opted not to return to the study site because he was traveling a significant distance away and was overall very satisfied with the procedure’s outcome.

All patients who completed follow-up met the study’s pre-specified primary safety endpoint – device safety defined as no serious adverse event probably or definitely related to the device resulting in significant morbidity through 90-day follow-up. Patients underwent additional pre-specified outcome assessments at baseline and during post-operative follow-up, using well-established, standardized and validated measures to assess patient satisfaction, as well as changes in symptoms, motor and sensory function and neurophysiological parameters following carpal tunnel release. These outcome assessments included the Global Satisfaction Questionnaire, QuickDASH and Boston Carpal Tunnel Syndrome (BCTQ) Questionnaires, Ten Test and Semmes-Weinstein Monofilament sensory tests, Grip and Pinch Strength motor function tests, as well as nerve conduction and electromyographic studies. The excellent results of these pre-specified outcome assessments following CarpX minimally invasive carpal tunnel release were similar to, or better than, expected results following traditional open surgery.

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Minimally Invasive Interventions

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Regulatory History - continued

Additional observations from the study strongly support CarpX’s clinical and commercial potential. Surgeons were able to achieve the same anatomic result as traditional open surgery using a minimally invasive approach. Endoscopic visualization showed that CarpX cut the ligament cleanly and precisely, without evidence of thermal spread beyond the target tissue cut line. Procedure times fell after a short learning curve, indicating that CarpX minimally invasive carpal tunnel release can be performed in the same or less time as traditional open surgery. The final set of procedures were performed through 5-10 mm keyhole incisions, with no incision crossing the base of the palm, an area known to be problematic for healing, resulting in delayed recovery and persistent pain after traditional open surgery. The surgeons also observed that the CarpX balloon appeared to create more space within the carpal tunnel than traditional carpal tunnel release, which could favorably impact long-term outcomes.

CarpX Sales and Marketing

Once we obtain market clearance from the FDA, we expect to commercialize our products through a network of independent U.S. sales representatives and/or inventory-stocking medical distributors together with our in-house sales management and marketing teams. Our focus on high-margin products, including CarpX, are particularly suitable to this mode of distribution. A high gross margin allows us to properly incentivize our distributors, which in turn allows us to attract the top distributors with the most robust networks in our targeted specialties. Independent distributors play an even larger role in many parts of Europe, most of Asia and emerging markets worldwide.

We eventually may, however, choose to build (or obtain through a strategic acquisition) our own sales and marketing team to commercialize some or all of our products if it is in our long-term interests. We may also choose to enter into distribution agreements with larger strategic partners whereby we take full responsibility for the manufacturing of our products but outsource some or all of its distribution to a partner with its own robust distribution channels. Such agreements may include regional carve outs, minimum sales volumes, margin splitting and/or an option or right of first offer to purchase the technology at a future date. As our pipeline grows, we may choose to jointly commercialize subsets of related products which target certain medical specialties or healthcare locations.

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Infusion Therapy – PortIO and NextFlo

PortIO – Implantable Intraosseous Vascular Access Device

The Market

Vascular access devices, including peripheral intravenous catheters, central venous lines, peripherally inserted central catheters, tunneled catheters or implanted ports, are used to deliver various medications, fluids, blood products, nutrition or other therapeutic agents to patients with a wide variety of clinical conditions over multiple episodes spanning a period of days to weeks to months. A report by iData Research Group estimates the market for such devices to be several billion dollars annually. The market is moderately fragmented and highly commoditized, with slight premium pricing for modest features, including anti-infective coating, anti-thrombotic properties, tip location and power injector compatibility.

Current Devices and Their Limitations

Many chronically ill patients requiring long-term vascular access devices have poor or no central venous access as a result of repeated instrumentation of the veins or the presence of pacemaker and defibrillator leads, resulting in thrombosis or scarring. In addition, patients with renal failure need preservation of their peripheral and central veins for future dialysis access. The decades-old core technologies underlying currently available long-term vascular access devices have several limitations which relate directly to the intravascular component of the device. Up to 10% of such devices become infected, which can lead to costly and severe complications and even death (van de Wetering, Cochrane Database 2013). Since they are in constant contact with the blood stream, current devices require regular flushes to clear stagnant blood and prevent thrombus formation and occlusion. Despite these maneuvers, up to one-third of long-term vascular access devices become occluded at some point during their implantation period (Baskin, et al., Lancet 2009) and the resulting clot can dislodge as an embolism causing further downstream complications. This complication requires treatment with clot-dissolving agents or removal and implantation of a new device at an alternative site which in turn can lead to additional complications. Finally, most long-term vascular access devices require surgical insertion and removal, radiographic confirmation of tip placement and careful handling by trained clinicians to prevent the introduction of air into the circulation.

Our Solution

The intraosseous route provides a means for infusing fluids, medications and other substances directly into the bone marrow cavity which communicates with the central venous circulation via nutrient and emissary veins. This route is well established, having been used for decades in a variety of settings including trauma, especially military trauma, and pediatric emergencies. It has been shown to be bioequivalent to the intravenous route. Complication rates are low and there are few contraindications. Recently, physicians have expanded the use of the intraosseous route to non-emergent clinical scenarios. Currently available intraosseous devices pass through the skin into the bone and are therefore limited to short term use. We have developed a novel, implantable intraosseous vascular access device which does not require accessing the central venous system and does not have an indwelling intravascular component. It is designed to be highly resistant to occlusion and, we believe, may not require regular flushing. It features simplified, near-percutaneous insertion and removal, without the need for surgical dissection or radiographic confirmation. It provides a near limitless number of potential access sites and can be used in patients with chronic total occlusion of their central veins. We believe the absence of an intravascular component will result in a very low infection rate.

Our PortIO implantable intraosseous vascular access device is being developed for up to seven days of continuous use, as a means for infusing fluids, medications and other substances directly into the bone marrow cavity and from there into the central venous circulation.

We have advanced, in partnership with our design and contract manufacturing partners, our PortIO product from concept to working prototypes, benchtop, animal, and cadaver testing, commercial design and development, verification and validation testing. We are pursuing an FDA clearance for use in patients with a need for vascular access up to seven days, under de novo classification of section 513(f)2 of the FDCA. The broader “seven days” clearance is being pursued in discussion with FDA following our previous initial submission to the FDA for a 510(k) premarket notification for use in patients only requiring 24-hour emergency type vascular access. The GLP animal study requested by the FDA has been completed along with supplementary cadaver and animal studies. This data was submitted to the FDA as part of a pre-submission filing that included an in-person meeting on January 8, 2020 to define a likely small human clinical safety study through the de novo pathway. Based on encouraging animal data, we are also planning a long-term (60-day implant duration) FIH clinical study in dialysis patients or those with poor venous access in Colombia, South America and intend to fulfill the likely FDA request for human clinical data with an “outside-of-United States” clinical safety study in Auckland, New Zealand. Of significance toward our belief of PortIO will one day become the answer to solve many of the current drawbacks intravenous access devices regularly encounter, our supplemental animal testing has demonstrated maintenance-free patency over a six-month implant duration.

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NextFlo – Highly-Accurate Disposable Infusion System

The Market

Each day, over one million patients receive some type of infusion and 90% of hospitalized patients receive an intravenous infusion at some point during their hospital stay. (Husch et al. Quality & Safety in Health Care 2005; 14:80-86). Unlike twenty years ago, nearly all inpatient infusions, including routine ones which do not require flow adjustment, are delivered by expensive electric infusion pumps instead of with simple gravity. An increasing number of these patients are receiving infusions of medications or other substances outside of a hospital, in ambulatory facilities and at home. Disposable infusion pumps (“DIPs”) have many attractive features that favor their use in these settings over outpatient electric infusion pumps. Patients tend to favor DIPs because they are small, disposable, simple to operate, easy to conceal, and allow for greater mobility. They are used to deliver medications including antibiotics, local anesthetics and opioids. According to a report by Transparency Market Research, the overall global infusion market is estimated to be over $5.0 billion annually. DIPs account for approximately 10% of this market and inpatient infusion sets for about 20%.

Current Devices and Their Limitations

Infusion pump errors are a serious ongoing problem and represent a large share of the overall human and economic burden of medical errors. Electronic infusion pumps have become expensive, high-maintenance devices and have been plagued in recent years with recalls due to serious software and hardware problems. These pumps are designed for fine titration of infusions in complex patients such as those in a critical care setting. Using them for routine administration of medications or fluids is technological overkill. We believe there is a significant market opportunity for a simple, disposable device which can be incorporated into a standard infusion set and eliminate the need for expensive, problem-prone infusion pumps for routine inpatient infusions. In terms of outpatient infusions, currently marketed DIPs are powered by elastomeric membranes, compressed springs, compressed gas or vacuum and controlled by mechanical flow limiters. The primary limitation of DIPs is they can be highly inaccurate in actual use because they can be susceptible to changes in operating conditions (e.g., temperature, atmospheric pressure, viscosity, back pressure, partial filing and prolonged storage). As a result, their safety profiles make them unsuitable for use with medications, such as chemotherapeutics, where flow accuracy is critical to achieve the desired therapeutic effect and avoid complications. The FDA’s MAUDE database includes numerous reports of complications and even deaths as a result of DIPs infusing a particular medication too slowly or too fast. We believe there is a significant market opportunity for highly accurate disposable infusion pumps for outpatient use.

Our Solution

We have developed a highly-accurate infusion system with variable flow resistors. We acquired U.S. Patent 8,622,976 issued January 7, 2014 and associated U.S. and international patent applications, “System and Methods for Infusion of Fluids Using Stored Potential Energy and a Variable Flow Resistor”. We have built on the principles underlying this patent and developed a new concept whereby the variable resistor does not have to be mechanically linked to the infusion drive mechanism. This simplifies the design and expands the range of potential follow-on products. We have performed extensive computer simulation, built protypes, and conducted benchtop testing on various embodiments and have demonstrated highly-accurate flow rates across a wide range of driving pressures.

Our NextFlo product has been developed as a highly accurate, disposable intravenous (“IV”) infusion set. NextFlo maintains constant flow by incorporating a proprietary, passive, pressure-dependent variable flow-resistor consisting entirely of inexpensive, easy-to-manufacture disposable mechanical parts. We believe this technology will permit hospitals to return to gravity-driven infusions and eliminate expensive and troublesome electronic pumps for most of the over one million infusions of fluids, medications and other substances delivered each day in hospitals and outpatient settings in the United States.

The NextFlo disposable IV infusion set has achieved a key milestone in its quest to eliminate the need for complex and expensive electronic infusion pumps. NextFlo testing has now repeatedly demonstrated it can achieve constant flow rates across a wide range of IV bag heights, with accuracy rates comparable to electronic infusion pumps. Deloitte Consulting LLP has completed a comprehensive market research and strategic analysis of NextFlo demonstrating a very large addressable market and recommended PAVmed seek a long-term strategic partnership or acquisition. The global professional services firm Alvarez and Marsal has been running a formal M&A process for NextFlo targeting strategic and financial partners. The process is active with ongoing discussion with multiple parties.

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Emerging Innovations

We are evaluating a number of product opportunities and intellectual properties covering a spectrum of clinical conditions, which have either been developed internally or have been presented to us by clinician innovators and academic medical centers, for consideration of a partnership to develop and commercialize these products. Additionally, we are exploring other opportunities to grow our business and enhance shareholder value through the acquisition of pre-commercial or commercial stage products and /or companies with potential strategic corporate and commercial synergies. The emerging innovation products that we presently believe are furthest along the development timeline are as follows:

DisappEAR

PAVmed’s DisappEAR pediatric ear tubes, manufactured from a proprietary aqueous silk technology licensed from Tufts University and two Harvard teaching hospitals, seeks to revolutionize the care of the estimated one million children who undergo bilateral ear tube placement each year to treat complex or recurrent middle ear infections or fluid collections, by eliminating the need for a second procedure as well as the standard difficult-to-administer post-operative ear drop regimen. An eight-month animal study of DisappEAR has been completed with excellent results. The ear tubes appear to possess unexpected surfactant properties which would provide several unique benefits over traditional plastic tubes, including enhanced flow of fluids in and out of the tube and potential intrinsic antimicrobial properties. A six-month GLP animal study has been completed and the Company is in active discussions with a large strategic partner to produce commercial-scale aqueous silk to support a future FDA 510(k) submission and commercialization.

Noninvasive Glucose Monitoring

In October 2019, PAVmed incorporated Solys Diagnostics Inc. (“Solys”) and caused Solys to issue 8.3 million shares of its common stock to PAVmed and also to immediately enter into a license agreement with Liquid Sensing, Inc., a subsidiary of Airware, Inc., each an unrelated-third-party, in exchange for 1.5 million shares of Solys common stock issued to Airware, Inc., and 200,000 shares of Solys common stock issued to a unrelated-third-party consultant. Airware Inc. equity interests have certain anti-dilution rights under limited circumstances and 810,810 shares of Solys common stock issued to Airware Inc. are subject to certain milestone vesting restrictions. PAVmed Inc. and Airware Inc. have entered into a shareholder’s agreement which, among other customary terms, limits certain transfers of their respective ownership interests in Solys.

The exclusive worldwide licensing agreement with Liquid Sensing, Inc. grants to Solys a license for six issued and one pending U.S. patents covering a proprietary nondispersive infrared laser technology for the non-invasive detection of glucose and other substances such as electrolytes in tissue within the inpatient (e.g., hospital) field of use. Pursuant to the licensing agreement, Solys will immediately advance the technology toward an established accuracy milestone for blood glucose monitoring within the licensed field of use. Upon achievement of the accuracy milestone, it is expected Solys will then pursue a full regulatory and development plan while also seeking to maximize the value of this proprietary technology with potential strategic partners or acquirers in the blood glucose monitoring market. If commercialized by Solys, Liquid Sensing Inc. has the right to collect future royalties on revenues related to the product developed for commercial use. Liquid Sensing Inc. has granted a 15 percent equity interest in its company to PAVmed with a portion of the shares issued being subject to certain performance vesting restrictions.

FlexMo – Extracorporeal Membrane Oxygenation (ECMO) Cannula

We are developing a next generation Extracorporeal Membrane Oxygenation (“ECMO”) cannula to overcome current limitations and challenges related to cannula positioning and vascular access. ECMO is a treatment that uses a pump to circulate blood through an artificial lung back into the bloodstream during heart or lung failure or compromise. ECMO is used when the lungs cannot provide enough oxygen to the body or cannot get rid of carbon dioxide, or the heart cannot pump enough blood to the body. Clinicians have multiple choices in terms of cannula placement depending on the patient condition and traditionally two access sites are necessary to complete the circuit. Many of these configurations require precision placement of the cannula to ensure oxygenated blood is correctly circulated through the patient’s arterial system. The addition of these advanced and alternative tailored placements of ECMO cannula will allow clinicians to serve a greater patient population and increases likelihood of procedural success.

FlexMo’s proposed embodiment will expand opportunities across all clinical spectrums by allowing the reinfusion into any anatomic location, including Right Atrium, Right Ventricle, Pulmonary Artery, Left Atrium and the Aorta. With the advent of more portable and readily available ECMO technology, the use of ECMO has increased for every clinical indication and usage will continue to rise. Further development of FlexMo is subject to availability of additional financial resources. Once this product is commercialized, we believe it will garner a premium pricing and support increased use of ECMO through simplified procedural steps and enhanced vascular access pathways.

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NextCath - Self-Anchoring Short-Term Catheters

A wide variety of short-term catheters are used in clinical practice to infuse fluids, medications or other substances into a vein or other structures, to monitor physiologic parameters and to drain visceral organs or cavities. Currently marketed short-term catheters are not self-anchoring, they have been traditionally anchored to the skin with simple tape or some other adhesive incorporated into the sterile dressing. We are developing self-anchoring short-term catheters which do not require suturing, traditional anchoring techniques or costly add-on catheter securement devices. We are initially focusing on interventional radiology catheters which are less commoditized and result in significantly greater risk when dislodged. Our self-anchoring technique, however, is applicable to most, if not all, short-term catheters. The self-anchoring mechanism is integral to the catheter. It allows insertion with standard techniques and the use of simple clear sterile dressings. It allows the hub of the catheter to be flat and the tubing to come out eccentrically, or parallel to the skin, improving patient comfort and catheter management. We have filed a nonprovisional patent application, engaged design and contract manufacturing firms with experience in extrusions which have completed initial design work on the first product in the NextCath product line, and completed head-to-head testing of retention forces, comparing our working prototype to several competing products, which has validated our approach and advanced the commercial design and development process focusing on optimizing the self-anchoring helical portion as well as cost of materials and manufacturing processes. Further development of NextCath is subject to availability of additional financial resources. Once this product is commercialized, we believe it will garner premium pricing based on fewer complications and reduced overall costs.

Additional Products

We are evaluating a number of product opportunities and intellectual property covering a spectrum of clinical conditions, which have been presented to us by clinician innovators and academic medical centers, for consideration of a partnership to develop and commercialize these products; we are also exploring opportunities to partner with larger medical device companies to commercialize our lead products as they move towards regulatory clearance and commercialization. In this regard, we remain actively engaged with our full-service regulatory consulting partner and who is working closely with our contract design, engineering and manufacturing partners as our products advance towards regulatory submission, clearance, and commercialization.

We are exploring other opportunities to grow our business and enhance shareholder value through the acquisition of pre-commercial or commercial stage products and/or companies with potential strategic corporate and commercial synergies.

Our product pipeline is dynamic, and we adjust our development and commercialization plans based on real-time progress, changes in market conditions, commercial opportunity and availability of resources.

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Recent Events

Product Development Events

In June 2019, Lucid, PAVmed’s majority owned subsidiary, received FDA 510(k) marketing clearance for EsoCheck as a generic esophageal cell collection device. See “—GI Health— EsoGuard and EsoCheck Development and Commercial Status”.

In October 2019, Solys Diagnostics, PAVmed’s majority owned subsidiary, entered into a license agreement with Liquid Sensing, Inc., a subsidiary of Airware, Inc., granting Solys a license for six issued and one pending U.S. patents covering a nondispersive infrared laser proprietary technology for the non-invasively detection of glucose and other substances such as electrolytes in tissue within the inpatient (e.g., hospital) field of use. See “—Emerging Innovations—Noninvasive Glucose Monitoring.”

In December 2019, Lucid, PAVmed’s majority owned subsidiary completed CLIA/CAP certification for EsoGuard Esophageal DNA Test as an LDT at Lucid’s commercial diagnostic laboratory partner, ResearchDx. See “—GI Health— EsoGuard Clinical Laboratory and EsoCheck Manufacturing.”

In January 2020, an FDA pre-submission in-person meeting was held to review PortIO’s GLP animal study and to define a small human clinical safety study to support FDA approval through the de novo pathway. See “—Infusion Therapy—PortIO.”

In February 2020, Lucid, PAVmed’s majority owned subsidiary, received Breakthrough Device designation from the FDA for EsoGuard Esophageal DNA Test on esophageal samples collected using its EsoCheck Cell Collection Device. See “—GI Health—EsoGuard Business Strategy.”

In February 2020, the first patient was enrolled in Lucid’s IVD clinical trial for EsoGuard Esophageal DNA Test on esophageal samples collected using its EsoCheck Cell Collection Device. See “—GI Health—EsoGuard Business Strategy.”

In March 2020, we announced the FDA acknowledged receipt of a 510(k) premarket notification submission for the Company’s CarpX minimally invasive carpal tunnel device, which incorporates data from the Company’s successful first-in-human CarpX clinical safety study. See “—Minimally Invasive Interventions—CarpX.”

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Recent Events

Financing Transactions

In April, May and June 2019, we raised approximately $5.4 million, net, from three registered direct offerings of 5,480,000 shares of our common stock pursuant to our previously filed effective shelf registration statement on Form S-3 (File No. 333-220549).

In November 2019, we consummated the sale of a Senior Secured Convertible Notes in a private placement with a $14.0 million aggregate face value principle, referred to herein as the “November 2019 Senior Convertible Notes”.

The November 2019 Senior Convertible Notes were further sub-divided into a Series A and Series B, each having a face value principal of $7.0 million, with each referred to as the “Series A November 2019 Senior Convertible Notes” and the “ Series B November 2019 Senior Convertible Notes”. The Series A and Series B November 2019 Senior Convertible Notes each provide for the payment of a $700,000 lender fee, with such lender fee deducted from the proceeds when funded by the investors, and additionally, we are obligated to pay a financial advisory fee to the placement agent of 6.5% of the cash proceeds upon their receipt.

With respect to the Series A November 2019 Senior Convertible Notes, the investors delivered to us cash proceeds of $6.3 million on November 4, 2019, after deducting $0.7 million of lender fee, and we incurred total offering costs of $550,254, including a $409,500 advisory fee paid to the placement agent.

Subsequent to December 31, 2019, with respect to the Series B November 2019 Senior Convertible Note, the investors, at their election under the prepayment provisions, delivered to the Company cash proceeds of $6.3 million on March 30, 2020 after deducting $0.7 million of lender fees, and we paid an advisory fee of $409,500 to the placement agent.

In connection with the November 2019 Senior Convertible Notes, a registration statement on Form S-3 was filed with the SEC in December 2019, which has not yet been declared effective, for the common stock underlying the Series A November 2019 Senior Convertible Note.

Other Events

The Series B Convertible Preferred Stock provides for dividends at a rate of 8% per annum based on the $3.00 per share stated value of the Series B Convertible Preferred Stock, with such dividends compounded quarterly, accumulate, and are payable in arrears upon being declared by the Company’s board of directors. The Company’s board of directors declared a Series B Convertible Preferred Stock dividend payment of earned but unpaid dividends as of December 31, 2019, payable as of January 1, 2020, of an aggregate of $69,493, with such dividend payment settled by the issue of an additional 23,182 shares of Series B Convertible Preferred Stock in accordance with the Series B Certificate of Designation.

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Our Business Model

In contrast to pharmaceuticals and other life science technologies, which typically require long and capital-intensive paths to translate cellular or biochemical processes into commercially-viable therapeutics or diagnostics, we believe that medical devices have the potential to move much more rapidly from concept to commercialization with significantly less capital investment. Many commercially successful medical devices are often elegant solutions to important and prevalent clinical problems. Most medical device companies, however, are not structurally or operationally equipped to fulfill this potential. According to a report by Josh Makower, M.D., Consulting Professor of Medicine at Stanford University, the typical medical device company will spend over $31.0 million and take approximately five years to develop and commercialize a product through the FDA’s 510(k) pathway and over $100.0 million and seven or more years through the FDA’s PMA pathway.

Prior to forming PAVmed, our leadership team established a model to realize this potential in single-product companies by advancing medical device products from concept to commercialization using significantly less capital and time than a typical medical device company. When previously applied to single-product venture backed companies, the model utilized a virtual business structure. PAVmed’s structure enables us to retain the model’s tight focus on capital and time efficiency and the core elements which drive efficiency, including limited infrastructure and low fixed costs, while taking advantages of the economies of scale and flexibility inherent in a multi-product company.

Project Selection

A key element of our model is the project selection process. We choose projects to develop and commercialize based on characteristics which contribute to a strong commercial opportunity. We place a heavy emphasis on medical device products with the potential for high-margins and high-impact in attractive markets without regard to the target specialty or clinical area.

Our project selection process begins with the identification of an unmet clinical need. We seek prevalent medical conditions where we believe an opportunity exists to advance the care of the patient through improvements in existing technologies or the introduction of new platform technologies. In the current healthcare environment, this usually means our products must be less invasive and more cost effective. We select projects which we believe have the potential to lessen procedural invasiveness and/or the opportunity to shift care from the surgical operating room to lower-cost venues such as the interventional suite or the ambulatory setting. We expect our products to decrease complications, hospital stays, recovery times and indirect costs associated with a patient’s loss of productivity.

Additional characteristics which impact a project’s commercial opportunity are its technology, regulatory and reimbursement profiles. We typically select projects with strong intellectual property position, low to moderate technological complexity, low to moderate manufacturing costs and primarily disposable products do not require significant capital equipment.

One of the most important features we consider is the project’s regulatory pathway, both in the U.S. and internationally. The FDA’s less arduous 510(k) pathway requires us to demonstrate our product is safe and substantially equivalent to FDA-cleared predicates. The FDA’s costlier and more prolonged PMA pathway requires us to demonstrate our product is safe and effective through randomized clinical studies. A product which is eligible for the 510(k) pathway will require substantially less capital and time than one that requires full PMA clearance. With all our products we are very aggressive about identifying what we believe are the quickest paths to regulatory clearance, paying very careful attention to selection of the best predicates and references as well as careful attention to precisely crafting the primary indications for use language. Although we favor products eligible for the FDA’s 510(k) pathway, with or without clinical safety studies, we may also pursue PMA pathway products with large addressable markets, or in the case of one of our lead products, PortIO™, pursue classification under section 513(f)(2) of the FDCA, also referred to as de novo classification, which could be more rigorous than the 510(k) pathway, but generally require substantially less time and resources than a PMA pathway. We have a variety of options to commercialize such products more efficiently by initially, or even exclusively, targeting European or emerging markets which have shorter, less costly regulatory pathways for such projects. We also attempt to identify narrower applications and indications with lower regulatory hurdles will allow us to start commercializing our product, while broader applications and indications with higher hurdles move through the regulatory process.

The project’s reimbursement profile, both in the U.S. and internationally, is another very important component of the project’s commercial opportunity. We prefer projects with existing reimbursement codes, the opportunity to seek reimbursement under higher-value surgical procedure codes or the potential to seek reimbursement under narrow, product-specific codes as opposed to bundled procedure codes.

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Development and Commercialization Processes

Once we add a project to our pipeline, we map out development and commercialization processes specifically tailored to the product seeking to optimize capital and time efficiency and maximize value creation. The model emphasizes parallel development processes, such as engineering, quality, regulatory, supply chain, and manufacturing, utilizing outsourced, best-in-class process experts on an as-needed basis. We initially select the shortest, most-efficient path to commercialization of a safe and effective first-generation product. We then proceed with iterative product development based on real-life product performance and user feedback.

We intend to continue to utilize outsourced best-in-class process experts. We have strong relationships with a network of experts in design engineering, regulatory affairs, quality systems, supply chain management and manufacturing, including many with highly specialized skills in areas critical to our current and future pipeline. We will not be reluctant, however, to in-source certain heavily utilized process experts when and if we decide such a move will enhance our ability to execute on our strategy. As we grow, we expect to maintain a lean management infrastructure while expanding our bandwidth primarily with skilled project managers.

Although the PHG and PMI companies were created with a credible path to self-commercialization, they were fundamentally “built to sell.” We believe our structure will enhance our flexibility to commercialize our products compared to these and other single-product, development-stage companies. Each of our products generally follow one of three commercialization pathways. For certain products with one or more natural strategic acquirers such as PortIO and NextFlo, we may seek an early acquisition of the product prior to or soon after regulatory clearance, providing us with a source of non-dilutive capital. For certain groundbreaking high-margin products with large market opportunities such as CarpX™ and the EsoCheck™ Technology, we retain the flexibility to fully commercialize our products for the foreseeable future. For certain other high-volume, lower sale price products such as DisappEAR, we may seek to co-market them with strategic partners through sales and distribution agreements. For products we choose to commercialize ourselves, we may do so through a network of independent U.S. medical representatives and/or inventory-stocking distributors. We eventually may, however, choose to build (or obtain through a strategic acquisition) our own sales and marketing team, initially utilizing a hybrid model with national /regional sales management of independent distributors moving towards direct sales as warranted. As our pipeline grows, we may choose to jointly commercialize subsets of related products which target certain medical specialties or healthcare locations

Research and development expenses are recognized in the period they are incurred and consist principally of internal and external expenses incurred for the research and development of our products. We incurred approximately $15.7 million in cumulative research and development expenses from June 26, 2014 (inception) through December 31, 2019, inclusive of approximately $6.6 million and $4.3 million in each of the years ended December 31, 2019 and 2018, respectively. We plan to increase our research and development expenses for the foreseeable future as we continue development of our products. Our only product to obtain regulatory approval to date is EsoCheck, which has received 510(k) marketing clearance from the FDA as a generic esophageal cell collection device. EsoGuard has been established as an LDT that does not require regulatory approval and was launched commercially in December 2019 after completing CLIA/CAP certification of the test at Lucid’s commercial diagnostic laboratory partner ResearchDx, headquartered in Irvine, CA. Our current research and development activities are focused principally on obtaining FDA approval and clearance and initializing commercialization of the other lead products in our product portfolio pipeline, such as EsoGuard IVD, CarpX and PortIO, while advancing DisappEAR and NextFlo through development. The research and development activities on the other portfolio products is commensurate with available sufficient capital resources.

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Our Implementation Strategy

We intend to advance our lead products towards commercialization as quickly and efficiently as possible and expand our product pipeline by advancing our conceptual phase projects through patent submission and early testing.

Although we will continue to conceive and develop products internally, as we grow and expand our resources, we intend to expand our pipeline with innovative products sourced from third parties. In contrast to pharmaceuticals and other life sciences technologies, medical device innovation often begins with one, or at most a few, clinicians and/or engineers identifying an unmet clinical need and proposing a technological solution to address such need. Many academic medical centers and other large institutions try to aggregate their intellectual property through technology transfer centers and, more recently, through “innovation” centers which do not merely secure and transfer intellectual property, but actually advance projects internally prior to spinning them out for eventual commercialization.

It is our belief, despite these efforts, only a small fraction of the potential pool of intellectual capital (i.e. the universe of individual clinicians with innovative product ideas) is participating in medical device innovation. These clinicians rarely engage in the process for a variety of reasons, including the belief they are too busy, can’t afford to divert time away from their practice or that the upfront out-of-pocket costs are too great. Other clinicians believe they lack the knowledge or connections to successfully navigate the process. Technology transfer and full-fledged innovation centers have only had modest success in getting their clinicians to bring them innovative product ideas and even less success getting these products commercialized. Even centers with extensive resources are usually limited in their ability to advance products beyond the pre-clinical phase and are dependent on a shrinking pool of early-stage medical device venture capital to bring their products to market. Furthermore, some technology transfer and innovation centers associated with not-for-profit hospitals, universities, endowments and charitable organizations may be precluded from directly engaging in commercial sales of medical devices, creating opportunities for us to commercialize and market their intellectual property.

Our capital and time efficient model put us in strong position to partner with innovative clinicians and academic medical centers focusing on medical device innovation. We have developed a collaboration model focused on licensing technologies for development and commercialization. Since our founding, we have been contacted by clinicians and centers inquiring about opportunities to work with us on developing and commercializing their ideas and technologies. In November 2016, we signed a definitive licensing agreement with a group of leading academic institutions, including Tufts University and two Harvard Medical School teaching hospitals – Massachusetts Eye and Ear Infirmary and Massachusetts General Hospital. The agreement provides us with an exclusive worldwide license to develop and commercialize antibiotic-eluting resorbable ear tubes based on a proprietary aqueous silk technology conceived and developed at these institutions, a product we have initially referred to as DisappEAR. More recently, in May 2018, we licensed technologies from Case Western Reserve University for EsoGuard and EsoCheck. Within the twelve to eighteen months following the grant date of the license, Lucid Diagnostics, our majority owned subsidiary, achieved FDA 510(k) market clearance for EsoCheck and launched EsoGuard as an LDT at our contract laboratory in California. Typical in-license products, once commercialized, provided for the licensor institution to receive royalties based on revenue, and/or milestone payments, potentially including a portion of certain additional proceeds from the sale or sublicensing of the technology to a third party.

Whether internally or externally sourced, we seek to maintain balance within our pipeline with shorter-term, lower-risk products which offer the opportunity for more rapid commercialization, generating revenue to support development of longer-term products. As each product moves through our pipeline from concept to commercialization, we continuously reassess the product’s long-term commercial potential, balance it against other products in the pipeline and re-allocate resources accordingly. As such, we expect to have much greater flexibility to move products through our pipeline based on the actual developments and the overall interests of our company. We may accelerate, decelerate, pause or abandon a product and increase or decrease resources applied to a product based on a variety of factors including available capital, shifts in the regulatory, clinical, market and/or intellectual property landscape for a particular product, the emergence of one or more products with significantly greater commercial potential, or any other factor which may impact its long-term commercial potential.

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Approach to Sales and Marketing

We generally expect to commercialize our products through a network of independent U.S. medical representatives and/or inventory-stocking distributors. We focus on high-margin products which are particularly suitable to this mode of distribution. A high gross margin allows us to properly incentivize our distributors, which in turn allows us to attract the top distributors with the most robust networks in our targeted specialties. Independent distributors play an even larger role in many parts of Europe, most of Asia and emerging markets worldwide.

We eventually may, however, choose to build (or obtain through a strategic acquisition) our own sales and marketing team to commercialize some or all of our products if it is in our long-term interests. We may also choose to enter into distribution agreements with larger strategic partners whereby we take full responsibility for the manufacturing of our products but outsource some or all of its distribution to a partner with its own robust distribution channels. Such agreements may include regional carve outs, minimum sales volumes, margin splitting and/or an option or right of first offer to purchase the technology at a future date. As our pipeline grows, we may choose to jointly commercialize subsets of related products which target certain medical specialties or healthcare locations.

Manufacturing

We currently have no plans to manufacture our own products because the fixed overhead costs and limited flexibility that come with owning manufacturing facilities are not consistent with our capital efficient model. The entire medical device industry, including many of its largest players, depends heavily on contract manufacturers operating in the United States and abroad. Medical device manufacturers are subject to extensive regulation by the FDA and other authorities. Compliance with these regulations is costly and particularly onerous on small, development-phase companies. Contract manufacturers can also take advantage of significant economies of scale in terms of purchasing, machining, tooling, specialized personnel, sub-contracting or even off-shoring certain processes to lower-cost operators. These economies are simply not available to us.

We have relationships with many contract manufacturers, including those with specialized skills in several processes important to our devices. We expect them to have sufficient capacity to handle our manufacturing needs and anticipate our growth will be better served by deploying our resources to expand our pipeline and commercialization efforts.

We intend to work closely with our contract manufacturing partners to establish and manage our products’ supply chain, dual sourcing whenever possible. We expect to help them design and build our products’ manufacturing lines including subassembly, assembly, sterilization and packaging and to work closely with them to manage our quality system, to assure compliance with all regulations and to handle inspections or other queries with regulatory bodies. Our contract manufacturers have the ability to add lines and shifts to increase the manufacturing capacity of our products as our demand dictates. We may ship our products directly from our contract manufacturers, but we may also choose to utilize third-party regional warehousing and distribution services.

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Intellectual Property

Our business will depend on our ability to create or acquire proprietary medical device technologies to commercialize. We intend to vigorously protect our proprietary technologies’ intellectual property rights in patents, trademarks and copyrights, as available through registration in the United States and internationally. We currently have applied for or own 72 patents across 10 families of products. Patent protection and other proprietary rights are thus essential to our business. Our policy is to aggressively file patent applications to protect our proprietary technologies including inventions and improvements to inventions. We seek patent protection, as appropriate, on:

In addition to filing and prosecuting patent applications in the United States, we intend to file counterpart patent applications in Europe, Canada, Japan, Australia, China and other countries worldwide. Foreign filings can be cumbersome and expensive, and we will pursue such filings when we believe they are warranted as we try to balance our international commercialization plans with our desire to protect the global value of the technology.

The term of individual patents depends upon the legal term of the patents in the countries in which they are obtained. In most countries in which we file, the patent term is 20 years from the earliest date of filing a non-provisional patent application. In the United States, a patent’s term may be shortened if a patent is terminally disclaimed over another patent or as a result of delays in patent prosecution by the patentee, and a patent’s term may be lengthened by patent term adjustment, which compensates a patentee for administrative delays by the U.S. Patent and Trademark Office in granting a patent.

We intend to continuously reassess and fine-tune our intellectual property strategy in order to fortify our position in the United States and internationally. Prior to acquiring or licensing a technology from a third party, we will evaluate the existing proprietary rights, our ability to adequately obtain and protect these rights and the likelihood or possibility of infringement upon competing rights of others.

We will also rely upon trade secrets, know-how, continuing technological innovation, and may rely upon licensing opportunities in the future, to develop and maintain our competitive position. We intend to protect our proprietary rights through a variety of methods, including confidentiality agreements and/or proprietary information agreements with suppliers, employees, consultants, independent contractors and other entities who may have access to proprietary information. We will generally require employees to assign patents and other intellectual property to us as a condition of employment with us. All of our consulting agreements will pre-emptively assign to us all new and improved intellectual property that arise during the term of the agreement.

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Approach to Health Insurance Coverage and Reimbursement

Our ability to successfully commercialize our products will depend in part on the extent to which governmental authorities, private health insurers and other third-party payors provide coverage for and establish adequate reimbursement levels for the procedures during which our products are used.

In the United States, third-party payors continue to implement initiatives that restrict the use of certain technologies to those that meet certain clinical evidentiary requirements. In addition to uncertainties surrounding coverage policies, there are periodic changes to reimbursement. Third-party payors regularly update reimbursement amounts and also from time to time revise the methodologies used to determine reimbursement amounts. This includes annual updates to payments to physicians, hospitals and ambulatory surgery centers for procedures during which our products are used. An example of payment updates is the Medicare program’s updates to hospital and physician payments, which are done on an annual basis using a prescribed statutory formula. In the past, when the application of the formula resulted in lower payment, Congress has passed interim legislation to prevent the reductions.

A product’s reimbursement profile, both in the U.S. and internationally, is an important component of the product’s commercial opportunity. We prefer projects with existing reimbursement codes, the opportunity to seek reimbursement under higher-value surgical procedure codes or the potential to seek reimbursement under narrow, product-specific codes as opposed to bundled procedure codes. For those products that have high strategic value, but with less defined reimbursement, we have engaged reimbursement experts and support from industry associations to accelerate the acquisition of satisfactory reimbursement levels.

Competition for New Medical Device Innovation

Developing and commercializing new products is highly competitive. The market is characterized by extensive research and clinical efforts and rapid technological change. We face intense competition worldwide from medical device, biomedical technology and medical products and combination products companies, including major medical products companies. We may be unable to respond to technological advances through the development and introduction of new products. Most of our existing and potential competitors have substantially greater financial, marketing, sales, distribution, manufacturing and technological resources. These competitors may also be in the process of seeking FDA or other regulatory approvals, or patent protection, for new products. Our competitors may commercialize new products in advance of our products. Our products also face competition from numerous existing products and procedures, some of which currently are considered part of the standard of care. We believe the principal competitive factors in our markets are:

We will also compete in the marketplace to recruit and retain qualified scientific, management and sales personnel, as well as in acquiring technologies and licenses complementary to our products or advantageous to our business. We are aware of several companies that compete or are developing technologies in our current and future products areas. In order to compete effectively, our products will have to achieve market acceptance, receive adequate insurance coverage and reimbursement, be cost effective and be simultaneously safe and effective.

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Government Regulation

Government authorities in the United States, at the federal, state and local level, and in other countries extensively regulate, among other things, the research, development, testing, manufacture, quality control, approval, labeling, packaging, storage, recordkeeping, promotion, advertising, distribution, post-approval monitoring and reporting, marketing and export and import of products such as those we are developing. The following is a summary of the government regulations applicable to our business.

Healthcare Reform

Current and future legislative proposals to further reform healthcare or reduce healthcare costs may result in lower reimbursement for our products, or for the procedures associated with the use of our products, or limit coverage of our products. The cost containment measures payors and providers are instituting and the effect of any healthcare reform initiative implemented in the future could significantly reduce our revenues from the sale of our products. Alternatively, the shift away from fee-for-service agreements to capitated payment models may support the value of our products which can be shown to decrease resource utilization and lead to cost saving - for both payors and providers.

The implementation of the Affordable Care Act is an example that has the potential to substantially change healthcare financing and delivery by both governmental and private insurers can have a significant impact on the pharmaceutical and medical device industries.

As an example of Healthcare legislation volatility, the Affordable Care Act imposed, among other things, a new federal excise tax on the sale of certain medical devices. The Consolidated Appropriations Act, 2016 (Pub. L. 114-113), signed into law on Dec. 18, 2015, included a two-year moratorium on the medical device excise tax imposed by Internal Revenue Code section 4191. Because of the moratorium, the medical device excise tax did not apply to sales of taxable medical devices during the period beginning on January 1, 2016 and ending on December 31, 2017. The moratorium expired on Dec. 31, 2017. On January 22, 2018 as part of a stop gap spending bill, President Trump signed into law a moratorium for an additional two years retroactive to January 1, 2018. The tax was scheduled to go into effect until January 1, 2020. On December 20, 2019, the U.S. President signed into law a federal spending package that permanently repealed the 2.3% medical excise tax.

In addition, the ACA implemented payment system reforms including a national pilot program on payment bundling to encourage hospitals, physicians and other providers to improve the coordination, quality and efficiency of certain healthcare services through bundled payment models. In addition, other legislative changes have been proposed and adopted since the Patient Protection and Affordable Care Act, (“PPACA”) was enacted. On August 2, 2011, President Obama signed into law the Budget Control Act of 2011, which, among other things, created the Joint Select Committee on Deficit Reduction to recommend to Congress proposals in spending reductions. The Joint Select Committee did not achieve a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, triggering the legislation’s automatic reduction to several government programs. This includes reductions to Medicare payments to providers of 2.0% per fiscal year, which went into effect on April 1, 2013, and will stay in effect through 2024 unless congressional action is taken. On January 2, 2013, the American Taxpayer Relief Act of 2012 took effect, which, among other things, reduced Medicare payments to several providers, including hospitals, imaging centers and cancer treatment centers and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. We expect additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts federal and state governments will pay for healthcare products and services, which could result in reduced demand for our products or additional pricing pressure. Additionally, there is no assurance the PPACA, in whole or in part, will not be repealed in the future. Any impact such a repeal would have on the medical device industry remains unclear.

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FDA Regulation

Generally, products we develop must be cleared by the FDA before they are marketed in the United States. Before and after approval or clearance in the United States, our products are subject to extensive regulation by the FDA under the FDCA and/or the Public Health Service Act, as well as by other regulatory bodies. FDA regulations govern, among other things, the development, testing, manufacturing, labeling, safety, storage, recordkeeping, market clearance or approval, advertising and promotion, import and export, marketing and sales, and distribution of medical devices and products.

In the United States, medical devices are subject to varying degrees of regulatory control and are classified in one of three classes depending on the extent of controls the FDA determines are necessary to reasonably ensure their safety and efficacy:

In general, the higher the classification, the greater the time and cost to obtain approval to market. There are no “standardized” requirements for approval, even within each class. For example, the FDA could grant 510(k) status, but require a human clinical trial, a typical requirement of a PMA. They could also initially assign a device Class III status but end up approving a device as a 510(k) device if certain requirements are met. The range of the number and expense of the various requirements is significant. The quickest and least expensive pathway would be 510(k) approval with just a review of existing data. The longest and most expensive path would be a PMA with extensive randomized human clinical trials. We cannot predict how the FDA will classify our products, nor predict what requirements will be placed upon us to obtain market approval, or even if they will approve our products at all.

To request marketing authorization by means of a 510(k) clearance, we must submit a pre-market notification demonstrating the proposed device is substantially equivalent to another currently legally marketed medical device, has the same intended use, and is as safe and effective as a currently legally marketed device and does not raise different questions of safety and effectiveness than does a currently legally marketed device. 510(k) submissions generally include, among other things, a description of the device and its manufacturing, device labeling, medical devices to which the device is substantially equivalent, safety and biocompatibility information, and the results of performance testing. In some cases, a 510(k) submission must include data from human clinical studies. Marketing may commence only when the FDA issues a clearance letter finding substantial equivalence. After a device receives 510(k) clearance, any product modification that could significantly affect the safety or effectiveness of the product, or would constitute a significant change in intended use, requires a new 510(k) clearance or, if the device would no longer be substantially equivalent, would require PMA, or possibly, a de novo pathway under section 513(f)2 of the FDCA. In addition, any additional claims the Company wished to make at a later date may require a PMA. If the FDA determines the product does not qualify for 510(k) clearance, they will issue a Not Substantially Equivalent letter, at which point the Company must submit and the FDA must approve a PMA or issue premarket clearance using the de novo before marketing can begin.

In 1997, the Food and Drug Administration Modernization Act (FDAMA) added the de novo classification pathway under section 513(f)(2) of the FD&C Act, establishing an alternate pathway to classify new devices into Class I or II that had automatically been placed in Class III after receiving a Not Substantially Equivalent (NSE) determination in response to a 510(k) submission. In this process, a sponsor who receives an NSE determination may, within 30 days of receiving notice of the NSE determination, request FDA to make a risk-based classification of the device under section 513(a)(1) of the Act.

In 2012, section 513(f)(2) of the FD&C Act was amended by section 607 of the Food and Drug Administration Safety and Innovation Act (FDASIA), to provide a second option for de novo classification. In this second pathway, a sponsor who determines there is no legally marketed device upon which to base a determination of substantial equivalence may request FDA to make a risk-based classification of the device under section 513(a)(1) of the Act without first submitting a 510(k).

During the review of a 510(k) submission, the FDA may request more information or additional studies and may decide the indications for which we seek approval or clearance should be limited. In addition, laws and regulations and the interpretation of those laws and regulations by the FDA may change in the future. We cannot foresee what effect, if any, such changes may have on us.

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FDA Regulations will continue to change and evolve including the 2016-21st Century Cures Act which mandated the creation and revision of policies and processes intended to speed patient access to new medical devices and codifying into law the FDA’s expedited review program for breakthrough devices for which EsoGuard was so designated. In 2017, the Food and Drug Administration Reauthorization Act (FDARA) which included improvements to premarket review times and investments in strategic initiatives like the National Evaluation System for health Technology (NEST) and patient input and decoupling accessory classification from classification of the parent device. We must continue to be aware of these changes that possibly impact our development and commercialization work. The Company has a network of professionals with extensive experience in these matters that advise us on both the pre-approval/clearance requirements as well as the post market surveillance compliance obligations.

Clinical Trials of Medical Devices

One or more clinical trials may be necessary to support an FDA submission. Clinical studies of unapproved or uncleared medical devices or devices being studied for uses for which they are not approved or cleared (investigational devices) must be conducted in compliance with FDA requirements. If an investigational device could pose a significant risk to patients, the sponsor company must submit an Investigational Device Exemption, or IDE application to the FDA prior to initiation of the clinical study. An IDE application must be supported by appropriate data, such as animal and laboratory test results, showing it is safe to test the device on humans and the testing protocol is scientifically sound. The IDE will automatically become effective 30 days after receipt by the FDA unless the FDA notifies the company the investigation may not begin. Clinical studies of investigational devices may not begin until an institutional review board (“IRB”) has approved the study.

During any study, the sponsor must comply with the FDA’s IDE requirements. These requirements include investigator selection, trial monitoring, adverse event reporting, and record keeping. The investigators must obtain patient informed consent, rigorously follow the investigational plan and study protocol, control the disposition of investigational devices, and comply with reporting and record keeping requirements. We, the FDA, or the IRB at each institution at which a clinical trial is being conducted may suspend a clinical trial at any time for various reasons, including a belief the subjects are being exposed to an unacceptable risk. During the approval or clearance process, the FDA typically inspects the records relating to the conduct of one or more investigational sites participating in the study supporting the application.

Post-Approval Regulation of Medical Devices

After a device is cleared or approved for marketing, numerous and pervasive regulatory requirements continue to apply. These include:

We will continue to be subject to inspection by the FDA to determine our compliance with regulatory requirements.

Manufacturing cGMP Requirements

Manufacturers of medical devices are required to comply with FDA manufacturing requirements contained in the FDA’s current Good Manufacturing Practices (cGMP) set forth in the quality system regulations promulgated under section 520 of the FDCA. cGMP regulations require, among other things, quality control and quality assurance as well as the corresponding maintenance of records and documentation. Failure to comply with statutory and regulatory requirements subjects a manufacturer to possible legal or regulatory action, including the seizure or recall of products, injunctions, consent decrees placing significant restrictions on or suspending manufacturing operations, and civil and criminal penalties. Adverse experiences with the product must be reported to the FDA and could result in the imposition of marketing restrictions through labeling changes or in product withdrawal. Product approvals may be withdrawn if compliance with regulatory requirements is not maintained or if problems concerning safety or efficacy of the product occur following the approval. We expect to use contract manufacturers to manufacture our products for the foreseeable future we will therefore be dependent on their compliance with these requirements to market our products. We work closely with our contract manufacturers to assure our products are in strict compliance with these regulations.

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Other U.S. Regulation

In addition to FDA restrictions on marketing and promotion of drugs and devices, other federal and state laws restrict our business practices. These laws include, without limitation, anti-kickback and false claims laws, data privacy and security laws, as well as transparency laws regarding payments or other items of value provided to healthcare providers.

Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available under such laws, it is possible some of our business activities, including certain sales and marketing practices and the provision of certain items and services to our customers, could be subject to challenge under one or more of such laws. If our operations are found to be in violation of any of the health regulatory laws described above or any other laws that apply to us, we may be subject to penalties, including potentially significant criminal and civil and administrative penalties, damages, fines, disgorgement, imprisonment, exclusion from participation in government healthcare programs, contractual damages, reputational harm, administrative burdens, diminished profits and future earnings, and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our results of operations. To the extent any of our products are sold in a foreign country, we may be subject to similar foreign laws, which may include, for instance, applicable post-marketing requirements, including safety surveillance, anti-fraud and abuse laws and implementation of corporate compliance programs and reporting of payments or transfers of value to healthcare professionals.

Physician Payment Sunshine Act

There has been a recent trend of increased federal and state regulation of payments and transfers of value provided to healthcare professionals or entities. On February 8, 2013, the Centers for Medicare & Medicaid Services, or CMS, released its final rule implementing section 6002 of the Affordable Care Act known as the Physician Payment Sunshine Act that imposes new annual reporting requirements on device manufacturers for payments and other transfers of value provided by them, directly or indirectly, to physicians and teaching hospitals, as well as ownership and investment interests held by physicians and their family members. A manufacturer’s failure to submit timely, accurately and completely the required information for all payments, transfers of value or ownership or investment interests may result in civil monetary penalties of up to an aggregate of $150,000 per year, and up to an aggregate of  $1 million per year for “knowing failures.” Manufacturers that produces at least one product reimbursed by Medicare, Medicaid, or Children’s Health Insurance Program and (i) if the product is a drug or biological, and it requires a prescription (or physician’s authorization) to administer; or (ii) if the product is a device or medical supply, and it requires premarket approval or premarket notification by the FDA are required to comply with the Open Payments (commonly referred to as the Sunshine Act) filing requirements under CMS. We currently do not have any products covered by Medicare, Medicaid, or Children’s Health Insurance Program as none of our products have premarket approval or clearance notification. We expect once our products receive regulatory clearance, we will be required to comply with the Sunshine Act provisions.

Certain states, such as California and Connecticut, also mandate implementation of commercial compliance programs, and other states, such as Massachusetts and Vermont, impose restrictions on device manufacturer marketing practices and require tracking and reporting of gifts, compensation and other remuneration to healthcare professionals and entities. The shifting commercial compliance environment and the need to build and maintain robust and expandable systems to comply with different compliance or reporting requirements in multiple jurisdictions increase the possibility a healthcare company may fail to comply fully with one or more of these requirements.

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Federal Anti-Kickback Statute

The Federal Anti-Kickback Statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving any remuneration (including any kickback, bribe or rebate), directly or indirectly, overtly or covertly, to induce or in return for purchasing, leasing, ordering or arranging for or recommending the purchase, lease or order of any good, facility, item or service reimbursable, in whole or in part, under Medicare, Medicaid or other federal healthcare programs. The term “remuneration” has been broadly interpreted to include anything of value. Although there are a number of statutory exceptions and regulatory safe harbors protecting some common activities from prosecution, the exceptions and safe harbors are drawn narrowly. Practices that involve remuneration that may be alleged to be intended to induce prescribing, purchases or recommendations may be subject to scrutiny if they do not qualify for an exception or safe harbor. Failure to meet all of the requirements of a particular applicable statutory exception or regulatory safe harbor does not make the conduct per se illegal under the Anti-Kickback Statute. Instead, the legality of the arrangement will be evaluated on a case-by-case basis based on a cumulative review of all its facts and circumstances. Several courts have interpreted the statute’s intent requirement to mean if any one purpose of an arrangement involving remuneration is to induce referrals of federal healthcare covered business, the Anti-Kickback Statute has been violated.

Additionally, the intent standard under the Anti-Kickback Statute was amended by the Patient Protection and Affordable Care Act of 2010, as amended by the Health Care and Education Reconciliation Act of 2010, collectively the Affordable Care Act, to a stricter standard such that a person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation. In addition, the Affordable Care Act codified case law that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act.

Federal False Claims Act

The False Claims Act prohibits, among other things, any person or entity from knowingly presenting, or causing to be presented, a false or fraudulent claim for payment or approval to the federal government or knowingly making, using or causing to be made or used a false record or statement material to a false or fraudulent claim to the federal government. A claim includes “any request or demand” for money or property presented to the U.S. government. The False Claims Act also applies to false submissions that cause the government to be paid less than the amount to which it is entitled, such as a rebate. Intent to deceive is not required to establish liability under the False Claims Act. Several pharmaceutical, device and other healthcare companies have been prosecuted under these laws for, among other things, allegedly providing free product to customers with the expectation the customers would bill federal programs for the product. Other companies have been prosecuted for causing false claims to be submitted because of the companies’ marketing of products for unapproved, and thus noncovered uses.

The government may further prosecute, as a crime, conduct constituting a false claim under the False Claims Act. The False Claims Act prohibits the making or presenting of a claim to the government knowing such claim to be false, fictitious, or fraudulent and, unlike civil claims under the False Claims Act, requires proof of intent to submit a false claim.

The Foreign Corrupt Practices Act

The Foreign Corrupt Practices Act, or the FCPA, prohibits any U.S. individual or business from paying, offering, or authorizing payment or offering of anything of value, directly or indirectly, to any foreign official, political party or candidate for the purpose of influencing any act or decision of the foreign entity in order to assist the individual or business in obtaining or retaining business. The FCPA also obligates companies whose securities are listed in the United States to comply with accounting provisions requiring the company to maintain books and records that accurately and fairly reflect all transactions of the corporation, including international subsidiaries, and to devise and maintain an adequate system of internal accounting controls for international operations. Activities that violate the FCPA, even if they occur wholly outside the United States, can result in criminal and civil fines, imprisonment, disgorgement, oversight, and debarment from government contracts.

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International Regulation

In order to market any product outside of the United States, we would need to comply with numerous and varying regulatory requirements of other countries and jurisdictions regarding quality, safety and efficacy and governing, among other things, clinical trials, marketing authorization, commercial sales and distribution of our products. We may be subject to regulations and product registration requirements in the areas of product standards, packaging requirements, labeling requirements, import and export restrictions and tariff regulations, duties and tax requirements. Whether or not we obtain FDA approval for a product, we would need to obtain the necessary approvals by the comparable foreign regulatory authorities before we can commence clinical trials or marketing of the product in foreign countries and jurisdictions. The time required to obtain clearance required by foreign countries may be longer or shorter than required for FDA clearance, and requirements for licensing a product in a foreign country may differ significantly from FDA requirements.

European Union

The European Union or EU will require a CE mark certification or approval in order to market our products in the various countries of the European Union or other countries outside the United States. To obtain CE mark certification of our products, we will be required to work with an accredited European notified body organization to determine the appropriate documents required to support certification in accordance with existing medical device directive. The predictability of the length of time and cost associated with such a CE mark may vary or may include lengthy clinical trials to support such a marking. Once the CE mark is obtained, we may market our product in the countries of the EU. The new European Medical Device Regulation (EU MDR 2017/745) goes into effect on May 26, 2020. The EU MDR imposes strict new requirements on medical device companies marketing their products in Europe. As such, many device companies have been scrambling to renew existing CE certificates granted under the Medical Devices Directive (MDD 93/42/EEC). Notified Bodies are now focused on their current customers and those customers’ current devices making it virtually impossible to submit a new MDD application before May 2020.

European Good Manufacturing Practices

In the European Union, the manufacture of medical devices is subject to good manufacturing practice (GMP), as set forth in the relevant laws and guidelines of the European Union and its member states. Compliance with GMP is generally assessed by the competent regulatory authorities. Typically, quality system evaluation is performed by a Notified Body, which also recommends to the relevant competent authority for the European Community CE Marking of a device. The Competent Authority may conduct inspections of relevant facilities, and review manufacturing procedures, operating systems and personnel qualifications. In addition to obtaining approval for each product, in many cases each device manufacturing facility must be audited on a periodic basis by the Notified Body. Further inspections may occur over the life of the product.

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Employees

Currently, we have fifteen full-time compensated employees, including our Chairman of the Board of Directors and Chief Executive Officer (“CEO”), our President and Chief Financial Officer (“CFO”), and our Chief Medical Officer (“CMO”). Our non-employee Vice Chairman is currently not a compensated employee of the Company, but is a compensated member of our board of directors. No employees are covered by a collective bargaining agreement. We consider our relationship with our employees to be good.

Corporate History

We were incorporated on June 26, 2014 in the State of Delaware, under the name PAXmed Inc. On April 19, 2015, we changed our name to PAVmed Inc.

Our principal business address is One Grand Central Place, Suite 4600, 60 East 42nd Street, New York, New York 10165, and our main telephone number is (212) 949-4319.

Our founders include three accomplished medical device entrepreneurs: Lishan Aklog M.D., Michael J. Glennon, and Brian J. deGuzman, M.D. In 2007, they founded Pavilion Holdings Group (“PHG”), a medical device holding company with a vision to create innovative single-product medical device companies using an outsourced business model focused on capital efficiency and speed to market. Two years later PHG formed Pavilion Medical Innovations (“PMI”), a venture-backed medical device incubator. Between 2008 and 2013, PHG and PMI founded four distinct, single-product medical device companies, three of which commercialized products and one of which was acquired, each as discussed below.

Vortex Medical Inc., founded in 2008 with $3.5 million in capital, created the AngioVac system, designed to remove large volume clots and other undesirable intravascular material without the need for open surgery. It received its initial FDA clearance 16 months after the company was founded. AngioVac was commercially launched in 2009 and the first AngioVac procedure was performed at Harvard’s Brigham and Women’s Hospital later the same year. Vortex Medical marketed the AngioVac system across the United States until it was acquired in October 2012 by AngioDynamics Inc. (NASDAQ: ANGO) for $55.0 million in guaranteed consideration. At the time of its acquisition the company was cash-flow positive, carried no debt and did not require any additional capital beyond original $3.5 million raised.

Saphena Medical Inc., spun out of PMI in 2013 with $3.0 million in initial capital, created the VenaPax next-generation endoscopic vessel harvest device for use during coronary artery bypass surgery, which received FDA clearance in 18 months after the company was founded. VenaPax was first commercialized at Harvard’s Massachusetts General Hospital in late 2014. VenaPax is currently being marketed across the United States.

Cruzar Medsystems Inc., spun out of PMI in 2013 with $2.5 million in capital, created a novel peripheral chronic total occlusion (CTO) device for use in peripheral arterial disease, which received its initial FDA 510(k) clearance in late 2015, and was first commercialized in May 2016, and is currently being marketed across the United States.

PAVmed Inc. was founded to adapt this model to a multi-product company with access to public capital markets. We believe this model allows us to conceive, develop and commercialize our pipeline of medical device products using significantly less capital and time than a typical medical device company, and provide a streamlined pathway to incorporate outside innovations.

Available Information

We make available free of charge through our website our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, or the “Exchange Act.” We make these reports available through our website as soon as reasonably practicable after we electronically file such reports with, or furnish such reports to the SEC. We also make available, free of charge on our website, the reports filed with the SEC by our executive officers, directors and 10% stockholders pursuant to Section 16 under the Exchange Act as soon as reasonably practicable after copies of those filings are provided to us by those persons. The public also may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE., Washington, DC 20549, on official business days during the hours of 10 a.m. to 3 p.m. The public may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. The SEC also maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding us that we file electronically with the SEC.

Our website address is http://www.pavmed.com. The content of our website is not incorporated by reference into this Annual Report on Form 10-K, nor in any other report or document we file with the SEC, and any reference to our website are intended to be inactive textual references only.